Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-azd-2_03-cv-02390/USCOURTS-azd-2_03-cv-02390-2/pdf.json

Nature of Suit Code: 890
Nature of Suit: Other Statutory Actions
Cause of Action: 15:77 Securities Fraud

---

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

WO

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF ARIZONA

Lawrence J. Warfield, Reciever, 

Plaintiff, 

vs.

Michael Alaniz, et al., 

Defendants. 

)

)

)

)

)

)

)

)

)

)

)

)

No. CV 03-2390-PHX-JAT

AMENDED ORDER SUPERCEDES

AUGUST 1, 2006, ORDER

Pending before the Court is the Receiver’s Motion for Partial Summary Judgment

(doc. 464) and the Rada Defendants’ Motion for Summary Judgment (doc. 476). The Court

now rules on the motions. 

I. INTRODUCTION

Lawrence Warfield (the “Plaintiff” or the “Receiver”) is the court-appointed Receiver

for the Mid-America Foundation (“Mid-America”). On April 14, 2005, the Plaintiff filed

his Third-Amended Complaint. On December 29, 2005, the Plaintiff moved for partial

summary judgment on the fraudulent-transfer claim alleged against Defendants Leonard and

Elizabeth Bestgen, Robert Caroll, Rudy and Mary Crosswell, Charles Davis, Richard Derk,

Orville and Dale Frazier, Ronald Allen Kerher, Dwight Lankford, John and Candes Rada,

Case 2:03-cv-02390-JAT Document 515 Filed 09/06/06 Page 1 of 28
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

1

 Renald Bidwell is appearing pro se in this matter and failed to file a response to the

Motion for Summary Judgment. The Plaintiff has not moved for summary disposition with

respect to Defendant Bidwell. In the interest of adjudicating claims on their merits, the Court

will not dispose of this claim summarily. Accordingly, this Court’s analysis of the

Receiver’s Motion for Partial Summary Judgment shall be construed as including Renald

Bidwell as well as the Rada Defendants.

- 2 -

Paul and Patrick Wehrly (the “Rada Defendants”), as well as Renald Bidwell.1

 

On December 30, 2005, the Rada Defendants filed a cross-motion for summary

judgment. 

II. LEGAL ANALYSIS

The standard for summary judgment is set forth in Rule 56(c) of the Federal Rules of

Civil Procedure. Under this rule, summary judgment is properly granted when: (1) no

genuine issues of material fact remain; and (2) after viewing the evidence most favorably to

the non-moving party, the movant is clearly entitled to prevail as a matter of law. Fed. R.

Civ. P. 56; Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 106 S.Ct. 2548, 2552-53 (1986);

Eisenberg v. Ins. Co. of N. Am., 815 F.2d 1285, 1288-89 (9th Cir. 1987). The Court must

regard as true the non-moving party’s evidence, if it is supported by affidavits or other

evidentiary material. Celotex, 477 U.S. at 324, 106 S.Ct. 2548; Eisenberg, 815 F.2d at 1289.

However, the non-moving party may not merely rest on its pleadings, it must produce some

significant probative evidence tending to contradict the moving party’s allegations and

thereby creating a material question of fact. Anderson v. Liberty Lobby, Inc., 477 U.S. 242,

256-57, 106 S.Ct. 2505, 2513-14 (1986) (holding that the plaintiff must present affirmative

evidence in order to defeat a properly supported motion for summary judgment); First Nat'l

Bank v. Cities Serv. Co., 391 U.S. 253, 289, 88 S.Ct. 1575, 1592 (1968). 

The parties agree that Arizona substantive law applies to the state-law claims at issue

in the pending motions. 

Although the parties filed separate motions for summary judgment, the issues raised

by the parties overlap. Therefore, rather than address each motion separately, the Court will

organize its discussion by the issues raised. 

Case 2:03-cv-02390-JAT Document 515 Filed 09/06/06 Page 2 of 28
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

2

 Due to the ancillary nature of these proceedings, this Court’s decision not to revisit

this purely legal issue is also consistent with the “law of the case” doctrine.

- 3 -

A. Lack of Standing

The Rada Defendants argue that the Plaintiff lacks standing to assert various claims

asserted in the Third-Amended Complaint. 

1. Claims based on the Purchase of Charitable Gift Annuities

The Rada Defendants argue that they are entitled to summary judgment on counts 7

and 8 of the Plaintiff’s Third-Amended Complaint because: (1) Charitable Gift Annuities

(“CGA or “the annuities”) are excluded from the definition of “security” under both state and

federal laws; and (2) even if CGAs are securities, they are “exempted securities,” excluded

by 15 U.S.C.A (“U.S.C.”) § 77(c)(a)(8) (West 1997), which provides a “safe harbor” for

charitable securities. 

As the Rada Defendants concede on page 5 of their Memorandum of Points and

Authorities in Support of their Motion for Summary Judgment, in S.E.C. v. Dillie, CV 01-

2493-PHX-JAT (the underlying S.E.C. proceeding that authorized this lawsuit against the

Defendants), this Court found that the CGAs at issue were “securities,” not subject to any

exemptions, for purposes of application of the relevant securities laws. While it is true that

the Rada Defendants were not parties to that action and are not bound by that ruling, the

Court nevertheless finds the ruling to be correct and applicable to this case as well.2

 

Consistent with this Court’s ruling in S.E.C. v. Dillie, CV 01-2493-PHX-JAT, and for

the reasons set forth in the Receiver’s Response and Opposition to Rada Defendants’ Motion

for Summary Judgment filed in this case, the Court finds that the CGAs at issue in this case

are securities not subject to any exemptions. 

a. The Mid-America CGAs are Securities

Congress’ purpose in enacting the federal securities laws was to regulate investments

– regardless of the form they take or the name that they are called. S.E.C. v. Edwards, 540

U.S. 389, 393, 124 S.Ct. 892, 896 (2004). Consistent with that purpose a “security,” as

Case 2:03-cv-02390-JAT Document 515 Filed 09/06/06 Page 3 of 28
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

3

 The term security is defined under both the Federal Securities Act of 1933, and the

Federal Exchange act of 1934, however, the definitions are virtually identical. S.E.C. v. R.G.

Reynolds Enters., Inc., 952 F.2d 1125, 1130 n. 4 (9th Cir. 1999).

- 4 -

defined by federal securities law,3

 broadly encompasses “virtually any instrument that might

be sold as an investment.” Id. The term security has been defined to include any “note” or

“ investment contract.” S.E.C. v. Edwards, 540 U.S. 389, 393, 124 S.Ct. 892, 896 (2004).

As discussed below, the CGAs at issue in this case qualify as investment contracts. 

Although the term “investment contract” is not defined in the securities legislation,

the United States Supreme Court held that an investment contract “involves an investment

of money in a common enterprise with profits to come solely from the efforts of others. Id.

(discussing and quoting SEC v. W.J. Howey Co., 328 U.S. 293, 66 S.Ct. 1100 (1946)). Because

the definition of “security” is substantially similar under Arizona law, Arizona courts apply

this same test to determine whether an instrument constitutes an investment contract. Nutek

Information Sys. v. Ariz. Corp. Comm’n, 194 Ariz. 104, 108, 977 P.2d 826, 830 (Ct. App.

1998), cert. denied, AKS Daks Communications, Inc. v. Ariz. Corps. Com’n, 528 U.S. 932,

120 S.Ct. 332, 145 (1999). The test must be applied in light of the economic realities of the

transaction rather than the labels used by the participants in the transaction. United Housing

Inc. v. Forman, 421 U.S. 837, 851-852, 95 S.Ct. 2051, 2060 (1975). 

Despite the Defendants’ assertions to the contrary, there is “no reason to distinguish

between promises of fixed returns and promises of variable returns for purposes of the test.”

Edwards, 540 U.S. at 394-95, 124 S.Ct. at 897. In fact, instruments pitched as low-risk (such

as those offering a “guaranteed” fixed return) are “particularly attractive to individuals more

vulnerable to investment fraud, including older and less sophisticated investors,” such as

those in this case. Id.

Here, the investors paid money to Mid-America through an irrevocable gift of cash,

securities, or other assets. In return, Mid-America promised to pool the money in

investments such as stocks, bonds, and money market funds, and to periodically pay each of

Case 2:03-cv-02390-JAT Document 515 Filed 09/06/06 Page 4 of 28
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

4

 Despite the fact that Mid-America was paid through irrevocable gifts, the investors

clearly expected a return on their investment in the form of annuity payments, tax benefits,

and at the investors death, the return of the gift to a charity or charities designated by that

investor. 

5

 In the Ninth Circuit, there is a “common enterprise” when, as here, the investors

money was to be pooled. Hocking v. Dubois, 885 F.2d 1449, 1459 (9th Cir. 1989), cert.

denied, 494 U.S. 1078, 110 S.Ct. 1805 (1990).

6

 This element is met where the managerial efforts made by those other than the

investor affect the failure or success of the enterprise. Hocking, 885 F.2d at 1455. This

element is clearly met because Mid-America exercised complete control over the

“investment” of the funds transferred to it by the investors.

- 5 -

the investors a fixed sum of money based on their individual ages and the date that payments

commenced. In addition to a monthly income stream, the investors expected to receive

substantial tax benefits resulting from their purchase of the CGAs. 

The Court finds that the financial instruments at issue in this case are securities for

purposes of both federal and state securities law because they involve: (1) an investment of

money;4

 (2) in a common enterprise;5 (3) with a reasonable expectation by the investors of

profits to be derived from the managerial efforts of others.6

 Howey, 328 U.S. at 301, 66 S.Ct.

at 1104; Rose v. Dobras, 128 Ariz. 209, 211, 624 P.2d 887, 889 (Ct. App. 1981).

b. The Mid-America CGAs are not Exempt

The exemptions of the Federal Securities Act of 1933 (the “Securities Act”) and the

Federal Exchange Act of 1934 (the “Exchange Act”) do not apply in this case. The

Securities Act contains an exemption for certain insurance products such as insurance

policies and annuities subject to regulation by an insurance commissioner or officer

performing similar functions. 15 U.S.C.A. § 77c(a)(8) (West 1997). However, the mere use

of the label “annuity” does not result in exemption. CJS Securities § 57: Insurance Policies

and Annuities. Just because the issuer promises to serve as an investment agency, the

assumption of an investment risk by the issuer does not alone allow a variable annuity to

constitute insurance. Id. The question common to the exemption provisions is whether the

Case 2:03-cv-02390-JAT Document 515 Filed 09/06/06 Page 5 of 28
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28 7

 The Philanthropy Protection Act of 1995. 

- 6 -

issuer has issued contracts of insurance. S.E.C. v. Variable Annuity Life Ins. Co., 359 U.S.

65, 68, 79 S.Ct. 618, 620 (1959). The United States Supreme Court has stated that the

“earmark of insurance,” as it has been commonly perceived in popular understanding, is that

the issuer bears all of the risk of the investment. Id. at 71-73, 79 S.Ct. at 622-23. 

The GCAs in this case were not issued by an insurance agency. Likewise, they were

not fixed annuities regulated by a government agency. Mid-America was not an insurance

company. Mid-America operated solely to facilitate Dillie’s Ponzi scheme, and the investors

were its only source of revenue. The revenue was pooled and invested in stocks, bonds,

money market funds, federal obligations, and other short-term and long-term investments,

solely for the purpose of facilitating the Ponzi scheme. Thus, the CGAs in this case did not

shift the risk of investment from the investors to Mid-America. Were the investment scheme

to fail, and due to the nature of a Ponzi scheme Mid-America knew that it ultimately would

fail, the risk of financial loss would, and did, fall entirely on the investors. Mid-America

bore no true underwriting risks, as contemplated by the United States Supreme Court’s

definition of exempted insurance products and companies. Moreover, as noted previously,

the fact that Mid-America promised the investors a “fixed” return, does not remove the

CGAs from the definition of a security. Edwards, 540 U.S. at 397, 124 S.Ct. at 899.

The Exchange Act exempts any security “issued by or any interest or participation in

any pooled income fund, collective trust fund, collective investment fund, or similar fund that

is excluded from the definition of an investment company under section 80a-3(c)(10)(B).”

15 U.S.C.A. § 78c(a)(12)(A)(v). 15 U.S.C. § 80a-3(c)(10)(B)(iii) (West 1997 & Supp.

2005),7

 excludes from the definition of an investment company, “assets contributed to a

charitable organization in exchange for the issuance of charitable gift annuities.” However,

the mere fact that Mid-America called its financial instrument a “charitable gift annuity” does

not remove that investment from the definition of a security via this exclusion. See, e.g.,

United Housing Foundation, 421 U.S. at 850, 95 S.Ct. at 2059 (the name given to an

Case 2:03-cv-02390-JAT Document 515 Filed 09/06/06 Page 6 of 28
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

- 7 -

instrument is not dispositive). 

The definition of a security “embodies a flexible rather than a static principle, one that

is capable of adaption to meet the countless and variable schemes devised by those who seek

the use of the money of others on the promise of profits.” Howey, 328 U.S. at 229, 66 S.Ct.

at 1103. As noted previously, economic form, not substance, determines whether an

instrument is a security. Tcherepnin v. Knight, 389 U.S. 338, 336, 88 S.Ct. 542, 553 (1967).

Here, although the GCA’s were denominated as “charitable gift annuities,” the investors’

funds were pooled in a “common enterprise” with the expectation that Mid-America’s

management of the funds would result in profits to the investors. As this Court held

previously, regardless of whether Mid-America called its financial instruments “charitable

gift annuities,” they were in fact investment contracts. 

The Securities Act and the Exchange Act are remedial in nature and their purpose is

to: 

prevent further exploitation of the public by the sale of unsound,

fraudulent, and worthless securities through misrepresentation;

to place adequate and true information before the investor; to

protect honest enterprise, seeking capital by honest presentation

against the competition afforded by dishonest securities offered

to the public through crooked promotion . . .

S.E.C. v. Koscot Interplanetary, Inc., 497 F.2d 473, 480 (5th Cir. 1974) (quoting Senate

Committee on Banking & Currency, S.Rep.No.47, 73d Cong., 1st Sess. 1 (1933)). Broad and

liberal interpretations should be employed to reflect this remedial purpose. Stowell v. Ted

S. Finkel Inv. Services, Inc., 489 F.Supp. 1209, 1219 (S.D. Fla. 1980). This Court’s holding

that the financial instruments at issue in this case are investment contracts and are not subject

to any exemptions is consistent with this remedial purpose of the Securities Act, Exchange

Act, and Philanthropic Protection Act, and is well within the broad scope of securities

regulation. 

The Court’s holding is also consistent with 15 U.S.C. § 78c(3)(b)(2), which explicitly

provides that the Exchange Act exemption for “funds contributed to a charitable organization

in exchange for the issuance of charitable gift annuities,” is not available to persons who

Case 2:03-cv-02390-JAT Document 515 Filed 09/06/06 Page 7 of 28
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

- 8 -

collect commissions or special compensations collected based on the number or value of

“donations,” collected for the fund. Here, there is no dispute that the Defendants collected

commissions based on their sale of the Mid-America “CGAs.” Thus, the exception set forth

in 15 U.S.C.A. § 78(c)(a)(12)(A)(v) is not available to the Defendants in this case. 

2. Claims Brought on Behalf of Third-party “Victims” 

The Rada Defendants argue that they are entitled to summary judgment on the

Plaintiff’s claims of: (1) breach of fiduciary duty (Count One); (2) constructive fraud in a

confidential relationship (Count Two); (3) negligence and gross negligence (Count Four);

(4) fraud (Count Six); (5) declaratory and equitable relief/unjust enrichment (Count Five);

(6) conversion (Count Ten); and (7) equitable disgorgement (Count Eleven), for the reason

that the Plaintiff lacks standing to bring claims on behalf of third-parties. 

The Rada Defendants argue that the Plaintiff only has authority to bring claims

belonging to the entity in receivership (Mid-America) not on behalf of third parties (the

purchasers of the CGAs). See e.g., Scholes v. Lehemann, 56 F.3d 750, 753 (7th Cir. 1995)

(an equity receiver may sue only to redress injuries to the entity in receivership); Scholes v.

Stone, McGuire & Benjamin, 821 F.Supp. 533, 535 (N.D. Ill. 1993) (it is a well-known legal

principle that a receiver can bring only those claims belonging to the entity it represents and

cannot bring claims on behalf of third parties; receivers in general have standing to assert

state-law claims on behalf of entities in receivership but such claims must involve damages

which belong to the entities rather than to the investors); Johnson v. Miller, 596 F.Supp. 768,

772 (D. Colo. 1984) (finding that the plaintiff lacked standing to assert claims which

belonged to the individual investors not the corporation in receivership, but did have standing

to assert claims for wrongs committed against the corporation in receivership). 

The Rada Defendants argue that while the Receiver can bring claims to redress

injuries to the entity in receivership (Mid-America), the damages alleged in these causes of

action were suffered by third-party “victims” (the purchasers of the CGAs) not Mid-America.

The Rada Defendants contend that these state-law claims are personal to the injured parties.

For example, the Rada Defendants argue that the alleged fiduciary duty, duty of due care, and

Case 2:03-cv-02390-JAT Document 515 Filed 09/06/06 Page 8 of 28
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

- 9 -

confidential relationship, were all owed by the Rada Defendants to the investors, not to the

Plaintiff. The Rada Defendants argue that the Plaintiff lacks standing to bring claims or

collect and distribute a damage award among the victims. 

The Plaintiff argues that he has standing to bring these claims because, in his capacity

as Receiver, he seeks redress “for injuries to the underlying receivership entities.” The

Plaintiff also argues that Mid-America was injured when Dillie transferred funds to the Rada

Defendants to further the Ponzi scheme, and that the Receiver is entitled to return of such

funds to redistribute to Mid-America’s creditors (the victims). See, e.g., Scholes, 56 F.3d at

753 (finding that a corporation in receivership was harmed by transfers used for an

unauthorized purpose and the receiver had standing to bring claims to seek return of such

funds to distribute them to the tort creditors of the receivership); S.E.C. v. Cook, 2001 WL

256172 (D.C. Tex. 2001) (a receiver represents not only the entity in receivership, but also

the interests of its creditors) (not reported). The Plaintiff also argues that the Receiver has

standing to bring claims in the interest of creditors based on public-policy grounds. See, e.g.,

Craft v. Sunwest Bank of Albuquerque, N.A., 84 F.Supp.2d 1226, 1231 (D. N.M. 1999)

(causes of action such as breach of fiduciary duty by an officer of a company belong to the

company and a receiver has standing to bring such causes of action whether or not the action

could have been brought on behalf of policyholders or other creditors; a receiver has standing

to bring breach-of-trust and negligence claims because, if successful, they will benefit the

estate as a whole rather than any individual claimant); Cordial v. Ernst & Young, 483 S.E.2d

248, 257 (W. Va. 1996) (a receiver acts as the representative of interested parties, such as the

defunct corporation, its policyholders, creditors, shareholders, and other affected members

of the public and has standing, in its capacity as receiver, to bring an action to vindicate the

rights of such interested parties). 

Although there is a split in authority regarding this issue, the Court finds the

Plaintiff’s position more persuasive. The allegedly fraudulent transfers in this case removed

assets from Mid-America for an unauthorized purpose and by doing so injured Mid-America.

See Scholes v. Lehmann, 56 F.3d at 754. The defrauded investors in this case are tortCase 2:03-cv-02390-JAT Document 515 Filed 09/06/06 Page 9 of 28
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

- 10 -

creditors of the receivership. See id. at 755. Mid-America is entitled to seek return of these

funds for the benefit of the receivership, so that it may reimburse its creditors and/or victims

of its tortious actions. See id. at 754. Additionally, the alleged state-law causes of action,

if successful, will benefit the receivership estate as a whole rather than any individual

creditor. See Craft, 84 F.Supp.2d at 1231. Accordingly, the Court finds that the Receiver

has standing to bring the alleged state-law claims. 

` B. Personal Jurisdiction over Non-resident Defendants

The Plaintiff’s Third-Amended Complaint alleges violations of the Federal Securities

and Exchange Acts as well as pendent state-law claims. The Rada Defendants argue that

because CGAs are not “securities,” the Plaintiff cannot prove a violation of federal securities

law and the “nationwide service of process” provision of the Federal Securities and

Exchange Act, 15 U.S.C.A. § 78aa (West 1997), does not apply to them. They also argue

that Arizona’s “Long Arm Statute” does not confer jurisdiction over the non-resident

Defendants. Thus, the Rada Defendants argue, the Court must dismiss all claims against the

non-resident Defendants for lack of personal jurisdiction.

In order to find that the United States District Court for the District of Arizona has

personal jurisdiction over the Rada Defendants, there must be an applicable rule or statute

which potentially confers jurisdiction over them. Secs. Investor Prot. Corp. v. Vigman, 764

F.2d 1309, 1313-14 (9th Cir. 1985). Additionally, the assertion of such jurisdiction must

comport with constitutional principles of due process. Id. 

15 U.S.C. § 78aa provides that any suit or action to enforce any liability or duty

created under the Securities Act may be brought in the district where any act or transaction

constituting the violation occurred, and process may be served in any district where the

defendant is an inhabitant or wherever the defendant may be found. Secs. Investor Prot.

Corp., 764 F.2d at 1314. Thus, if a lawsuit seeks to enforce a liability created by the

Securities Act, the court has jurisdiction of the defendant “wherever he may be found.” San

Mateo County Transit Dist. v. Dearman, Fitzgerald and Roberts, Inc., 979 F.2d 1356, 1358

(9th Cir. 1992). Because 15 U.S.C. § 78aa provides for nationwide service of process, the

Case 2:03-cv-02390-JAT Document 515 Filed 09/06/06 Page 10 of 28
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

- 11 -

statute confers personal jurisdiction over defendants served within the United States.

Mariash v. Morrill, 496 F.2d 1138, 1142-43 (2d Cir. 1974). 

When a federal district court is sitting in diversity, due process requires that the

defendant have some minimum “contacts, ties or relations” with the forum state in order to

confer personal jurisdiction over the defendant. Secs. Investor Prot. Corp, 764 F.2d at 1315.

However, “minimum contacts” with a particular district or state for purposes of personal

jurisdiction is not a limitation imposed on the federal courts in a federal-question case by due

process concerns. Id. Congress can provide for nationwide service of process in federal

court for federal-question cases without falling short of the requirements of due process. Id.

Thus, where a federal statute, such as 15 U.S.C. § 78aa, confers nationwide service of

process, “the question becomes whether the party has sufficient contacts with the United

States, not any particular state.” Id. (internal quotation and citation omitted); accord

Go-Video, Inc. v. Akai Elec. Co., Ltd., 885 F.2d 1406, 1414 (9th Cir. 1989) (as long as a

party has minimum contacts with the United States, Section 27 of the Securities Exchange

Act confers personal jurisdiction over the defendant in any federal district court).

Because this Court held that CGAs are securities and are not exempted, the Plaintiff’s

allegations of violations of federal securities laws permits application of 15 U.S.C. § 78aa.

Although the Rada Defendants argue that the non-resident Defendants do not have minimum

contacts with the State of Arizona, they do not contest that the Defendants were served

within the United States. Likewise, they do not argue that any of the Defendants do not have

minimum contacts with the United States. Accordingly, the Court finds that it has personal

jurisdiction over the Rada Defendants in this case and that the requirements of due process

have been met. 

The Rada Defendants suggest that nationwide service of process pursuant to § 78aa

extends only to the Plaintiff’s securities claims and does not confer personal jurisdiction over

the Rada Defendants with respect to the pendent state-law claims. The Court disagrees. As

the Third-Circuit Court of Appeals aptly stated:

[T]he Securities Act of 1933 and the Securities Exchange Act of

Case 2:03-cv-02390-JAT Document 515 Filed 09/06/06 Page 11 of 28
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28 8

 Section 27 of the Securities Exchange Act of 1934, 15 U.S.C. § 78aa.

- 12 -

1934 Congress has bestowed upon the United States District

Courts the power to extend their writ extraterritorily so as to

compel a personal appearance before them. Once the defendant

is before the court, it matters little, from the point of view of

procedural due process, that he has become subject to the court's

ultimate judgment as a result of territorial or extraterritorial

process[.] 

Robinson v. Penn Central Co., 484 F.2d, 553, 555 (3d Cir. 1973). Once the Court has

personal jurisdiction over the Rada Defendants pursuant to a federal statute, the question of

whether it can decide ancillary state-law claims is not one of personal jurisdiction but one

of subject matter jurisdiction. Id. In other words, the question is one of basic pendent

jurisdiction. Id. 

Because this Court has personal jurisdiction over the Rada Defendants pursuant to 15

U.S.C. § 78aa, principles of pendent jurisdiction give this Court the discretion to decide the

state-law claims as well. See, e.g, DeJames v. Magnificence Carriers, Inc., 654 F.2d 280,

284 (3d Cir.), cert. denied, 454 U.S. 1085 (1981) (provision authorizing nationwide service

of process in federal question case, obviates the need to rely on a long-arm statute for

authorization of service of process); Int’l Controls Corp. v. Vesco, 593 F.2d 166, 175 n. 5 (2d

Cir.), cert. denied, 442 U.S. 941, 99 S.Ct. 2884, 61 (1979) (finding that principles of pendent

jurisdiction allow a district court to consider state-law claims where a “Section 27”8

 claim

is alleged and service on the defendants has been made pursuant to that federal statute),

Robinson v. Penn Central Co., 484 F.2d 553, 555-56 (3d Cir. 1973) (a district court with

personal jurisdiction obtained by “extraterritorial” service authorized by federal statute has

discretion to consider pendent state-law claims); Gill v. Three-Dimensions Systs. Inc., 87

F.Supp.2d 1278, 1283 (M.D. Fla. 2000) (the Securities Exchange Act's nationwide service

of process provision applied to out-of-state defendants alleged to have committed securities

fraud could also be used to obtain personal jurisdiction over defendants with respect to

pendent state-law claims); Piper Acceptance Corp. v. Slaughter, 600 F.Supp. 169, 171-72

Case 2:03-cv-02390-JAT Document 515 Filed 09/06/06 Page 12 of 28
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

9

 These sections are provisions of the Arizona Uniform Fraudulent Transfer Act

(UFTA)

- 13 -

(D. Colo. 1985) (personal jurisdiction concerning federal claims is extended to related

ancillary state-law claims); accord Stewart v. Ragland, 934 F.2d 1033, 1036 (9th Cir. 1990)

(holding that the district court had personal and subject matter jurisdiction over federal

securities act claims and pendent state-law claims); Bulgo v. Munoz, 853 F.2d 710, 713 (9th

Cir. 1988) (holding that the district court had jurisdiction under section 27 of the Securities

Exchange Act, 15 U.S.C. § 78aa, 28 U.S.C. § 1331, and the principles of pendent

jurisdiction). 

The Rada Defendants’ request to dismiss the non-resident Defendants is denied.

C. Statute of Limitations, Statute of Repose, Doctrine of Laches

1. Statute of Limitations/Statute of Repose

Count Nine of the Plaintiff’s Third-Amended Complaint alleges that the Defendants

engaged in a series of fraudulent transfers that violate Ariz. Rev. Stat. Ann. (“A.R.S.”) §§ 44-

1004(A)(1) and (2) and 44-1005 (West 2003).9

 The Rada Defendants argue that they are

entitled to summary judgment on any fraudulent-transfer claims based on transfers made

prior to December 3, 1999, because such claims are barred and/or extinguished by the

applicable statute of limitations and/or statute of repose. 

Arizona has adopted a limitation period that was expressly tailored for fraudulent

transfers. Moore v. Browning, 203 Ariz. 102, 107, 50 P.3d 852, 857 (Ct. App. 2002) (citing

A.R.S. §§ 44-1008 and 44-1009). A.R.S. § 44-1009 (West 2003), provides, in relevant part:

A claim for relief with respect to a fraudulent transfer or

obligation under this article is extinguished unless an action is

brought:

1. Under § 44-1004, subsection A, paragraph 1

within four years after the transfer was made or

the obligation wasincurred or, if later, within one

year after the fraudulent nature of the transfer or

obligation was or through the exercise of

reasonable diligence could have been discovered

by the claimant.

Case 2:03-cv-02390-JAT Document 515 Filed 09/06/06 Page 13 of 28
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

- 14 -

2. Under § 44-1004, subsection A, paragraph 2 or

§ 44-1005, within four years after the transfer was

made or the obligation was incurred.

(emphasis added). Thus, a cause of action for fraudulent transfer under section § 44-

1004(A)(2) or § 44-1005 is extinguished if it is filed more than four years after the transfer.

Id. A cause of action brought under § 44-1004(A)(1) is extinguished if it was filed: (1) more

than four years after the transfer; and (2) more than one year after the allegedly fraudulent

nature of the transfers had been discovered or should have been discovered. Id.; Moore, 203

Ariz. at 108, 50 P.3d at 858.

The Rada Defendants point out that there is an absence of facts in the Complaint

suggesting that the Plaintiff was unable to discover the fraudulent nature of the transfers

within the applicable time frame. The Rada Defendants also provide evidence that: (1) on

October 21, 2001, Dillie and Mid-America sent a letter to the victims announcing MidAmerica’s insolvency; and (2) Mid-America was placed into receivership on December 20,

2001. The Rada Defendants argue that as the Receiver, the Plaintiff had access to each and

every payment and should have discovered the fraudulent nature of the transfers within the

first year of his receivership, yet waited until December 3, 2003, to file a Complaint. Thus,

by the Rada Defendants calculations, the Plaintiff is not entitled to the one-year “safety

window” for his claims based on actual or constructive notice, and all claims based on

transfers occurring prior to December 3, 1999, have been extinguished.

The Plaintiff argues that he was unable to discover the fraudulent nature of the

transfers alleged prior to the one-year period before he filed the Complaint. The Plaintiff

argues that his ability to discover the fraudulent nature of the earlier transactions was

hindered by the fact that he had to sort through hundreds of thousands of business records

that were not kept in order, and had to seek discovery from an individual attempting to avoid

prosecution. The Plaintiff argues that even if the limitations period does apply, it is a statute

of limitations – rather than a statute of repose – and is subject to equitable tolling. The

Plaintiff urges the Court to find that the limitation period was tolled until the date that the

Case 2:03-cv-02390-JAT Document 515 Filed 09/06/06 Page 14 of 28
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

- 15 -

Receiver was appointed (December 20, 2003). In other words, by the Plaintiff’s calculations,

the four-year time limit did not begin to run until December 20, 2003.

A statute of limitations is a procedural device that operates as a defense to limit the

remedy available for an existing cause of action. Duran v. Henderson, 71 S.W.3d 833, 837

(Tex. Ct. App. 2002). A statute of repose, on the other hand, creates a substantive right to

be free from liability after a legislatively-determined period. Id. While a statute of

limitations merely bars the enforcement of a right, a statute of repose extinguishes the claim

after the specified time period has expired. Id.; see also U.S. v. Bacon, 82 F.3d 822, 823 (9th

Cir. 1996). Unlike a traditional statute of limitations, the statute of repose contained in the

UFTA cannot be waived. Duran, 71 S.W.3d at 837. 

The Plaintiff cites no law in support of its argument that A.R.S. § 44-1009(A)(1) is

a statute of limitation rather than a statute of repose. The only Arizona case interpreting the

statute has referred to it as a “statute of repose.” Moore, 203 Ariz. at 107, 50 P.3d at 857.

Additionally, the fact that the legislature chose language specifying that claims brought

outside the statute’s time limits are “extinguished,” rather than merely “barred,” supports the

conclusion that this is a statute of repose rather than a statute of limitation. A.R.S. § 44-

1009; Bacon, 82 F.3d at 823.

Notably, after analyzing the statutory language and researching the legislative history,

the Arizona Court of Appeals declined to apply principles of equitable tolling. Id. at 110, 50

P.3d 860. This Court does likewise. A claim that has been extinguished cannot be tolled.

See Amoco Prod. Co. v. Newton Sheep Co., 85 F.3d 1464, 1472 (10th Cir. 1996) (statute of

repose sets “absolute time limit beyond which liability no longer exists and is not tolled”).

Consistent with the statutory language, the time limits applicable to the Plaintiff’s fraudulenttransfer claims began to run at the time that each allegedly fraudulent transfer took place, not

on the date that the Receiver was appointed. 

In sum, the Plaintiff filed his Complaint on December 3, 2003. Therefore, pursuant

to A.R.S. § 44-1009, the Plaintiff’s § 44-1004(A)(2) and § 44-1005 claims have expired to

the extent that they rely on fraudulent transfers occurring prior to December 3, 1999.

Case 2:03-cv-02390-JAT Document 515 Filed 09/06/06 Page 15 of 28
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

- 16 -

Likewise, any § 44-1004(A)(1) claims based on transfers occurring prior to December 3,

1999, have expired unless the Plaintiff can show that “through the exercise of reasonable

diligence,” he did not discover and could not have discovered the fraudulent nature of the

transfers earlier than one year before he filed his Complaint. Moore, 203 Ariz. at 108, 50

P.3d at 858. 

The Plaintiff, however, argues that he is not bound by the limitations set forth in

A.R.S. § 44-1009 because it is not binding on the government and this action was brought

by a court-appointed Receiver ancillary to an action initiated by the S.E.C. The only cases

cited by the Plaintiff in support of this argument involve statutes of limitation, not statutes

of repose. In re Diamond Benefits Life Ins. Co., 184 Ariz. 94, 98, 907 P.2d 63, 67 (1995)

(answering a question certified by the district court and finding that the receiver in a

delinquency proceeding is acting on behalf of the citizens of the state and is exempt from the

two-year statute of limitations for conversion); Warfield v. Gardner, 346 F.Supp.2d 1033,

1047 (D. Ariz. 2004) (holding that the statute of limitations for state-law cause of action for

conversion does not apply to a claim brought by a court-appointed receiver); accord A.R.S.

§ 12-510 (“Except as provided in § 12-529, the state shall not be barred by the limitations of

actions prescribed in this chapter”) (emphasis added). 

Substantive time limits, as opposed to procedural statutes of limitation, are binding

on the federal government. Resolution Trust Corp. v. Olson, 768 F.Supp. 283, 285 (D. Ariz.

1991). Put another way, although statutes of limitations are not binding on the government,

statutes of repose are. U.S. v. Rezzonico, 32 F.Supp.2d 1112, 1113 (D. Ariz. 1998); Shasta

View Irrigation Dist. v. Amoco Chemicals Corp., 986 P.2d 536, 543 (Or. 1999) (the public

policy for exempting governments from statutes of limitations does not apply to statutes of

ultimate repose). 

Notwithstanding the fact that the Plaintiff in this case is a court-appointed Receiver,

the Plaintiff is subject to the time limits set forth in A.R.S. § 44-1009(A)(1). Thus, the

Plaintiff cannot base its section § 44-1004(A)(2) or 1005 claims on fraudulent transfers that

took place prior to December 3, 1999 (more than four years prior to the initiation of this

Case 2:03-cv-02390-JAT Document 515 Filed 09/06/06 Page 16 of 28
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

10 The parties have presented evidence creating a genuine issue of fact regarding

whether the Plaintiff should have reasonably determined the fraudulent nature of these

transactions within the first year of his receivership.

- 17 -

lawsuit), because those claims have been extinguished. Id. However, the Plaintiff can base

its claims under § 44-1004(A)(1) on allegedly fraudulent transfers that took place prior to

December 3, 1999, unless this action was filed more than one year after the allegedly

fraudulent nature of the transfers should reasonably have been discovered. Id.; Moore, 203

Ariz. at 108, 50 P.3d at 858. Because the latter issue requires a factual determination,10 it is

not an issue this Court can resolve when deciding a motion for summary judgment. Id. at

111, 50 P.3d at 861. 

2. Doctrine of Laches

The Rada Defendants also argue that the doctrine of laches equitably bars recovery

due to the Receiver’s delay in bringing this action. The Rada Defendants acknowledge that

it is their burden to show that the defense of laches applies in this case. See, e.g., Lakin

Cattle Co. v. Engelthaler, 101 Ariz. 282, 284, 419 P.2d 66, 68 (1966) (an affirmative defense

must be plead and proved by the defendant).

The Rada Defendants argue that the doctrine of laches applies in this case because it

was unreasonable for the Receiver to wait more than two years after being appointed to file

these claims against the Defendants. The Rada Defendants argue that they have “been

injured due to the Receiver’s carelessness, laxity and ‘unreasonable delay’ in filing.”

The Plaintiff responds that the doctrine of laches is unavailable as a defense in this

case because this action was brought by the court-appointed Receiver as part of its

governmental function to protect the public from individuals attempting to defraud the

public. The Court agrees. 

The Rada Defendants do not dispute in their Reply that the Plaintiff filed this action

pursuant to his duties as the court-appointed Receiver. Equitable defenses, such as estoppel

and laches, “will not lie against the state, its agencies or subdivisions in matters affecting

Case 2:03-cv-02390-JAT Document 515 Filed 09/06/06 Page 17 of 28
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

- 18 -

governmental or sovereign functions.” Mohave County v. Mohave-Kingman Estates, Inc.,

120 Ariz. 417, 421, 586 P.2d 978, 982 (1978). Such equitable defenses are only available

when the state, agency, or municipality, is acting within its proprietary capacity in bringing

the lawsuit. Id.; see also, Heckler v. Comty. Health Servs. of Crawford County, Inc., 467

U.S. 51, 67, 104 S.Ct. 2218, 2227 (1984) (Rehnquist, J., concurring) (as a general rule, laches

is no defense to a suit brought by the government to enforce a public right or to protect a

public interest); Kerby v. State ex rel. Frohmiller, 62 Ariz. 294, 308, 157 P.2d 698, 704

(1945) (doctrine of laches does not apply against the state absent a statute expressly allowing

such a defense).

Federal courts have authority to issue a variety of “ancillary relief” measures in

actions brought by the S.E.C. to enforce the federal securities laws. S.E.C. v. Wencke

(Wencke II), 622 F.2d 1363, 1369 (9th Cir. 1980). One of those measures is to appoint a

receiver and impose a receivership over the various entities affected by the alleged fraud.

Id. The purpose of the appointment of a receiver is to prevent further violations of federal

securities laws and to protect the public. S.E.C. v. Wencke (Wencke I), 577 F.2d 619, 623

(9th Cir. 1978). The court-appointed receiver is “an officer of the court.” S.E.C. v. Am.

Principals Holding, Inc. (In re: San Vicente Medical Partners), 962 F.2d 1402, 1409 (9th

Cir. 1991). The filing of this ancillary lawsuit against the Defendants by the Receiver

appointed in S.E.C. v. Dillie et al., CIV-01-2493-PHX-JAT is an effort by the government

to protect the public. Thus, the Court finds that the doctrine of laches is not available to the

Rada Defendants as a defense to the Plaintiff’s claims. 

D. Availability of Constructive Trust as a Remedy (Count Three)

The Plaintiff’s Third-Amended Complaint alleges that the Defendants, as a result of

the actions alleged, received an unknown amount of “facilitation fees” and that a constructive

trust should be imposed on the facilitation fees and returned to the Receiver. The Rada

Defendants argue that a constructive trust is only a remedy and cannot be asserted as a

separate cause of action. The Plaintiff responds merely that the Court should construe the

Case 2:03-cv-02390-JAT Document 515 Filed 09/06/06 Page 18 of 28
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

- 19 -

reference to constructive trust in Count Three as a remedy requested for the underlying claim

of “secret profits.” The Court construes the Plaintiff’s reference to a constructive trust as a

request for a particular remedy, not a separate cause of action.

Next, the Rada Defendants argue that commissions they earned by selling the CGAs

are not receivership assets covered by the Court’s Order in S.E.C. v. Dillie, 01-2493-PHXJAT, and imposition of a constructive trust with respect to such monies would not only be

improper, but would violate the Rada Defendants’ due-process rights. Specifically, the Rada

Defendants argue that because they were not parties to the underlying S.E.C. action and did

not have an opportunity to participate in the receivership proceedings, they did not have

notice or an opportunity to participate in any of the hearings, or to object to the Court’s final

Order. Thus, they argue, incorporating their assets into the receivership estate would violate

their due-process rights. 

The Rada Defendants cite San Cincente Medical Partners Ltd. v. Am. Principals

Holding, Inc., 962 F.2d 1402, 1406 (9th Cir. 1992), for the proposition that procedural due

process requires that owners of property who were not named defendants in an S.E.C. action

must be provided with notice, an opportunity to retain counsel, participate in the proceedings,

and to voice objections and assert affirmative defenses. The Court agrees that the

Constitution requires that property owners receive procedural due process in the form of

notice and opportunity for a hearing. Id. at 1407. Property cannot be subjected to a court’s

judgment unless reasonable and appropriate efforts have been made to give the property

owners actual notice of the action. Id. For the reasons set forth below, the Court finds that

the Rada Defendants were provided with notice and an opportunity to be heard in this case.

A receiver in a S.E.C. action may petition the court for an order to show cause against

a possessor of money belonging to the receivership who is not a party to the original S.E.C.

action. U.S. v. Ariz. Fuels Corp., 739 F.2d 455, 458 (9th Cir. 1984). This sort of summary

proceeding satisfies the requirements of procedural due process so long as the non-party is

provided with adequate notice and opportunity to be heard. S.E.C. v. Wencke, 783 F.2d 829,

Case 2:03-cv-02390-JAT Document 515 Filed 09/06/06 Page 19 of 28
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

- 20 -

838 (9th Cir. 1986), cert. denied, 479 U.S. 818, 107 S.Ct. 77 (1986). Even in cases where

plenary proceedings were required, there is no due process violation unless the third-party

can show that he was prejudiced by the summary proceedings and would have been better

able to defend his interests in a plenary proceeding. Id. at 838. 

Although it is true that the Rada Defendants were not parties to S.E.C. v. Dillie, 01-

2493-PHX-JAT, the Rada Defendants are named parties to this action. In other words, this

is not a “summary” proceeding, it is a plenary action that is ancillary to the S.E.C. case. The

Rada Defendants have been provided all of the procedural protections that go along with a

plenary action. The Rada Defendants have been served with the Complaint. The Rada

Defendants have been permitted the opportunity to answer, take discovery, and file related

briefs and exhibits. The Rada Defendants have responded to the Receiver’s Motion for

Partial Summary Judgment. The Rada Defendants filed a Motion for Summary Judgment

asking for judgment on a number of the Plaintiff’s claims, and addressing the availability of

imposition of a constructive trust over the Defendants’ assets. This Court heard oral

argument on the issues raised by the Rada Defendants at a hearing on July 17, 2006. 

Clearly, the Rada Defendants had notice of the nature of these proceedings, as well

as an opportunity to respond. Accordingly, the Court concludes that the requirements of due

process have been met. See, e.g., In re San Vicente Medical Partners Ltd., 962 F.2d at 1407

(holding that where a third-party was not named in an underlying S.E.C. action, due process

requirements were met because opportunities for a hearing were available before any

material deprivation of a property interest occurred). 

The Rada Defendants also argue that the Plaintiff cannot prove all of the elements

necessary to impose a constructive trust over the Rada Defendants’ property. Specifically,

they cite Linder v. Lewis, Roca, Scoville & Beauchamp, 85 Ariz. 118, 123, 333 P.2d 286, 290

(1958), for the proposition that the Plaintiff must show that it is inequitable for Rada

Defendants to retain title.

A constructive trust is an equitable remedial device generally used to prevent unjust

Case 2:03-cv-02390-JAT Document 515 Filed 09/06/06 Page 20 of 28
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

- 21 -

enrichment. Burch & Cracchiolo, P.A. v. Pugliani, 144 Ariz. 281, 285, 697 P.2d 674, 678

(1985). A constructive trust arises by operation of law when the circumstances under which

property was acquired make it inequitable for the one who holds legal title to the property

to retain ownership. Bates v. Bates, 1 Ariz.App. 165, 168, 400 P.2d 593, 596 (Ct. App.

1965). Thus, through the constructive trust remedy, a court has jurisdiction to reach property

in the hands of a “wrongdoer.” Warren v. Whitehall Income Fund, 170 Ariz. 241, 244, 823

P.2d 689, 692 (Ct. App. 1992). Constructive trust must be proven by clear and convincing

evidence. Stoltz v. Maloney, 129 Ariz. 264, 267, 630 P.2d 560, 563 (Ct. App. 1981).

However, there is no set or unyielding formula in decreeing a constructive trust and courts

will do so when a party is under an equitable duty to give another the benefit of property to

which he has acquired legal title. Chirekos v. Chirekos, 24 Ariz.App. 223, 224, 537 P.2d

608, 609 (Ct. App. 1975). For the reasons set forth below, the Court concludes that there is

a material question of fact as to whether such circumstances are present in this case. 

The Rada Defendants agree that they were hired by Mid-America to sell CGAs and

earned commission based on a percentage of the sales. However, they allege that they had

no actual or constructive knowledge of Dillie’s actions or Mid-America’s financial problems.

The Rada Defendants also argue that the Plaintiff has provided no evidence that MidAmerica would have provided truthful financial information to the Rada Defendants had they

inquired. 

The Plaintiff, on the other hand, argues that industry standards required the

Defendants to obtain and examine Mid-America’s audited financial statements for the past

three years before selling the annuities. The Plaintiff’s contention appears to be supported,

at least in part, by the Defendants’ own financial expert. The Plaintiff has also provided

evidence that suggests that at least one of the Rada Defendants did ask for the audited

statements, but when Mid-America failed to provide them that Defendant proceeded to sell

the annuities anyway. 

Given the contradicting evidence presented by the parties, the Court finds that there

Case 2:03-cv-02390-JAT Document 515 Filed 09/06/06 Page 21 of 28
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

- 22 -

is a material question of fact as to whether the Rada Defendants’ conduct in this case is

sufficient to support the imposition of a constructive trust. 

It is also important to note that the Plaintiff in this case has not filed for injunctive

relief asking the Court to impose a constructive trust now, or at any time prior to the entry

of final judgment. The Receiver’s Response in Opposition to Rada Defendants’ Motion for

Summary Judgment makes it clear that the Plaintiff asserts the theory of constructive trust

in his Third-Amended Complaint only as a potential remedy in the event that the Plaintiff

prevails on the merits of his secret profits claim. Given the material questions of fact

discussed above, and the equitable nature of a constructive trust, it would be premature for

this Court to determine at this stage of the proceedings whether the remedy of constructive

trust will be available or necessary at the time that the secret profits claim is decided.

Accordingly, the Court declines to address the Rada Defendants’ remaining arguments

against the imposition of a constructive trust. The Rada Defendants can re-raise their

objections if the Plaintiff prevails on the secret profits claim and seeks to impose a

constructive trust in addition to a more traditional form of judgment. 

E. State-law Fraud Claim (Count Six)

The Rada Defendants argue that they are entitled to summary judgment on the claim

of fraud alleged in Count Six because the Plaintiff failed to allege: (1) the exact

misrepresentation stated by each Defendant; (2) the date, time, and place of each

misrepresentations; (3) that each of the Rada Defendants knew of the falsity of the

misrepresentation; (4) that the misrepresentations were unknown to the annuitants; and (5)

that the annuitants justifiably relied on the misrepresentations. The Receiver completely

failed to address this argument in his Response and Opposition to the Rada Defendants’

Motion for Summary Judgment.

A state law claim for fraud must be plead with particularity. Hall v. Romero, 141

Ariz. 120, 124, 685 P.2d 757, 761 (Ct. App. 1984). Mere allegations that the defendants’

actions were “fraudulent” are insufficient. Id. A complaint fails to state an actionable claim

Case 2:03-cv-02390-JAT Document 515 Filed 09/06/06 Page 22 of 28
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

- 23 -

unless all of the following elements have been alleged with particularity: (1) a representation;

(2) its falsity; (3) its materiality; (4) the speaker’s knowledge of its falsity or ignorance of its

truth; (5) his intent that it should be acted upon by the person and in the manner reasonably

contemplated; (6) the hearer’s ignorance of its falsity; (7) his reliance on its truth; (8) his

right to rely thereon; (9) his consequent and proximate injury. Nielson v. Flashberg, 101

Ariz. 335, 338-39, 419 P.2d 514, 517-18 (1966).

If the Receiver intended to present a claim of common-law fraud, it was his duty to

plead that claim in his Third-Amended Complaint, and to plead it with particularity. Rhoads

v. Harvey Publications, Inc., 131 Ariz. 267, 268, 640 P.2d 198, 200 (Ct. App. 1982). He

failed to do so. 

Where, as here, the party moving for summary judgment makes a prima facie showing

that no genuine issue of material fact exists, the burden shifts to the party opposing summary

judgment to produce sufficient competent evidence to show that a triable issue of fact does

remain. Ancell v. United Station Assocs., Inc., 803 P.2d 450, 452 (9th Cir. 1990). The

non-moving party may not merely rest on its pleadings, it must produce some significant

probative evidence tending to contradict the moving party’s allegations and thereby creating

a material question of fact. Anderson, 477 U.S. at 256-57, 106 S.Ct. at 2513-14 (holding that

the plaintiff must present affirmative evidence in order to defeat a properly supported motion

for summary judgment); First Nat'l Bank v. Cities Serv. Co., 391 U.S. 253, 289, 88 S.Ct.

1575, 1592 (1968). 

The Rada Defendants’ Motion for Summary Judgment is granted with respect to the

Plaintiff’s common-law fraud claim alleged in Count Six. 

F. Fraudulent-transfer Claim Asserted in Count Nine

The Plaintiff argues that he is entitled to summary judgment against the Rada

Case 2:03-cv-02390-JAT Document 515 Filed 09/06/06 Page 23 of 28
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

11 The Plaintiff does not move for summary judgment on the constructive fraud claims

brought pursuant to A.R.S. §§ 44-1004 (A)(2) and 44-1005.

- 24 -

Defendants on the fraudulent-transfer claim brought pursuant to A.R.S. § 44-1004(A)(1).

11

The Court has already held that a material question of fact exists as to whether the Plaintiff’s

§ 44-1004(A)(1) claims predating December 3, 1999, are extinguished by the applicable

statute of repose – A.R.S. § 44-1009. Therefore, the Receiver’s motion is denied with

respect to any fraudulent-transfer claims based on alleged transfers occurring on or before

December 3, 1999. The Court will now address the merits of the Plaintiff’s section 44-

1004(A)(1) fraudulent-transfer claim as it relates to transfers occurring after December 3,

1999. 

A section 1004(A)(1) fraudulent conveyance is based on a showing of actual fraud.

Thus, a fraudulent transfer under this statutory provision exists where there is “clear and

satisfactory evidence of an ‘actual intent to hinder, delay or defraud any creditor of the

debtor’ or of a debtor receiving no reasonable consideration for a transfer or obligation.”

Gerow v. Covill, 192 Ariz. 9, 17, 960 P.2d 55, 63 (Ct. App. 1998). Actual intent may be

shown by direct proof or by circumstantial evidence from which actual intent may be

reasonably inferred. Id. 

The statute itself provides a non-exclusive list of factors to consider when determining

if actual intent to hinder, delay or defraud exists. A.R.S. § 44-1004(B). Those “badges of

fraud” are as follows: (1) the transfer or obligation was to an insider; (2) the debtor retained

possession or control of the property transferred after the transfer; (3) the transfer or

obligation was disclosed or concealed; (4) before the transfer was made or obligation was

incurred, the debtor had been sued or threatened with suit; (5) the transfer was of

substantially all of the debtor’s assets; (6) the debtor absconded; (7) the debtor removed or

concealed assets; (8) the value of the consideration received by the debtor was reasonably

equivalent to the value of the asset transferred or the amount of the obligation incurred; (9)

the debtor was insolvent or became insolvent shortly after the transfer was made or the

Case 2:03-cv-02390-JAT Document 515 Filed 09/06/06 Page 24 of 28
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

12 A “Ponzi scheme” is a fraudulent arrangement in which an entity makes payments

to investors from monies obtained from later investors rather than from any “profits” of the

underlying business venture. In re Cohen, 199 B.R. 709, 717 (9th Cir. BAP 1996). The

fraud consists of funneling proceeds received from new investors to previous investors in the

guise of profits from the alleged business venture, thereby cultivating an illusion that a

legitimate profit-making business opportunity exists and inducing further investment. Id. 

- 25 -

obligation was incurred; (10) the transfer occurred shortly before or shortly after a substantial

debt was incurred; (11) the debtor transferred the essential assets of the business to a lienor

who transferred the assets to an insider of the debtor. No further evidence of the common

law elements of fraud are needed once actual intent is shown. Gerow, 192 at 17, 960 P.2d

at 63.

The Plaintiff does not rely on the traditional badges of fraud. Instead, the Plaintiff

argues that fraudulent intent is established as a matter of law when a defendant makes a

transfer in furtherance of a Ponzi scheme. Transfers made in furtherance of Ponzi12 schemes

have achieved a special status in fraudulent-transfer law. In re Grafton Partners, 321 B.R.

527, 532 (9th Cir. BAP 2005) (proof that the transferor was running a Ponzi scheme can

suffice to warrant a finding of actual fraud); In re Cohen, 199 B.R. 709, 717 (9th Cir. BAP

1996) (whether transfers were made with actual intent either to hinder or to delay or to

defraud creditors is the same under the Bankruptcy Code and UFTA; proof of a Ponzi

scheme is sufficient to establish the operator’s actual intent to hinder, delay, or defraud

creditors for purposes of actually fraudulent transfers); accord In re Agricultural Research

and Tech. Group, Inc. v. Palm Seedlings Partners-A, 916 F.2d 528, 535 (9th Cir. 1990)

(debtor’s actual intent to hinder, delay or defraud its creditors may be inferred from the mere

existence of a Ponzi scheme); In re World Vision, 275 B.R. 641, 656 (Bankr. M.D. Fla. 2002)

(in cases involving a Ponzi scheme, the analysis is simplified because fraudulent intent is

inferred). One can infer an intent to defraud future undertakers from the mere fact that an

individual was running a Ponzi scheme, because no other reasonable inference is possible.

 In re Slatkin, 310 B.R. 740, 748 (C.D. Cal. 2004). The orchestrator of the scheme must

know all along, from the very nature of his activities, that investors at the end of the line will

Case 2:03-cv-02390-JAT Document 515 Filed 09/06/06 Page 25 of 28
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

- 26 -

lose their money. Id. Knowledge to a substantial certainty constitutes intent in the eyes of

the law, and this knowledge that future investors will not be paid is sufficient to establish his

actual intent to defraud them. Id. 

The parties agree that Mid-America made commission payments to the Defendants.

Robert Dillie (“Dillie”) entered into a guilty plea agreement whereby he pled guilty to three

counts of an indictment related to his operation of a Ponzi scheme. Thus, the Plaintiff

contends that Dillie’s guilty plea conclusively establishes the existence of a Ponzi scheme

involving the Defendants and, therefore, satisfies the “intent to defraud” element of his

fraudulent-transfer claim. 

The Defendants argue that Dillie’s guilty plea does not establish that the these

Defendants had any intent to defraud the creditors. The Court agrees. A plea agreement

admitting to the operation of a Ponzi scheme is direct evidence of that individual’s intent to

defraud. In re Slatkin, 310 B.R. 740, 748 (C.D. Cal. 2004). However, the Rada Defendants

have not admitted to operating a Ponzi scheme. In fact, they contend that they were

completely unaware of Dillie’s scheme. And A.R.S. § 44-1008(A) provides an affirmative

defense where a defendant can prove, among other things, that he took “in good faith.”

Dillie admitted that he was using Mid-America to sell CGAs which he knew would

not be paid because of insufficient assets and because the monies collected from the sales

were being used for his own personal purposes. According to the indictment, Dillie used

Mid-America “to market[] [Charitable Gift Annuities] throughout the United States through

a network of commissioned sales brokers,” and that the Ponzi scheme was promoted by

“making at least $3 million in commission payments to brokers employed to sell [Charitable

Gift Annuities] to investors.” (Pages 2 and 5 of the Indictment). Although it is clear that

Dillie admitted to using Mid-America to solicit the Defendants to further his Ponzi scheme,

there is absolutely no indication by Dillie that the independent brokers, were “running,”

“operating,” or had any knowledge of the Ponzi scheme or the fact that the investors would

not be paid. 

The Court finds that the Receiver has shown the existence of a Ponzi scheme. The

Case 2:03-cv-02390-JAT Document 515 Filed 09/06/06 Page 26 of 28
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

- 27 -

Court finds that there was actual intent by the transferor Dillie and MAF. Thus, the Receiver

has, as a matter of law, shown the existence of a fraudulent transfer. However, the Court

finds that the parties have presented conflicting evidence, creating a material question of fact,

as to whether the Defendants are entitled to the defenses provided by statute, including the

good faith defense under A.R.S. § 44-1008(A). Accordingly, the Receiver’s Motion for

Partial Summary Judgment is denied. Because the Court has found a material question of

fact precluding the entry of summary judgment, it need not address the Defendants’

remaining arguments in opposition to summary judgment on the § 44-1004(A)(1) fraudulenttransfer claim. 

III. CONCLUSION

The Receiver’s Motion for Partial Summary Judgment is denied in its entirety. The

Court has personal jurisdiction over the Defendants pursuant to 15 U.S.C. § 78aa.

The Rada Defendants’ Motion for Summary Judgment is granted in part and denied

in part. The motion is granted with respect to: (1) the common-law fraud claim alleged in

Count Six of the Plaintiff’s Third-Amended Complaint; and (2) any A.R.S. §§ 44-1004(A)(2)

and 44-1005 fraudulent-transfer claims based on transactions occurring prior to December

3, 1999. The motion is denied with respect to any remaining §§ 1004(A)(2) and 44-1005

fraudulent-transfer claims based on transactions that occurred subsequent to the

aforementioned date. Given the existence of a material question of fact preluding summary

judgment, the Rada Defendants’ motion is also denied with respect to the Plaintiff’s A.R.S.

§ 44-1004(A)(1) fraudulent-transfer claims. The Rada Defendants’ Motion for Summary

Judgment is denied with respect to all other claims and/or arguments. 

/ / 

Case 2:03-cv-02390-JAT Document 515 Filed 09/06/06 Page 27 of 28
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

- 28 -

Accordingly,

IT IS ORDERED consistent with the above opinion, the Rada Defendants’ Motion

for Summary Judgment (doc. 476) is DENIED IN PART AND GRANTED IN PART. 

IT IS FURTHER ORDERED the Receiver’s Motion for Partial Summary Judgment

(doc. 464) is DENIED.

DATED this 5th day of September, 2006.

Case 2:03-cv-02390-JAT Document 515 Filed 09/06/06 Page 28 of 28