Opinion ID: 221659
Heading Depth: 2
Heading Rank: 3

Heading: Decision to Grant Preliminary Injunction

Text: The four elements a plaintiff must establish to secure a preliminary injunction are: (1) a substantial likelihood of success on the merits, (2) a substantial threat of irreparable injury if the injunction is not issued, (3) that the threatened injury if the injunction is denied outweighs any harm that will result if the injunction is granted, and (4) that the grant of an injunction will not disserve the public interest. Byrum, 566 F.3d at 445 (quotation marks omitted). The Receiver bore the burden of establishing each element. Bluefield Water Ass'n, Inc. v. City of Starkville, Miss., 577 F.3d 250, 253 (5th Cir.2009). The district court analyzed each of the elements in its grant of the preliminary injunction to the Receiver. The Employee Defendants challenge all aspects of the district court's analysis. We disagree with the Employee Defendants that the district court abused its discretion in issuing the preliminary injunction. We address each element in turn, reviewing the district court's ultimate decision to grant the preliminary injunction and its findings of fact for abuse of discretion and its legal determinations de novo. Byrum, 566 F.3d at 445.
The district court did not err in finding that the Receiver carried his burden of proving likelihood of success on the merits. To satisfy the first element of likelihood of success on the merits, the Receiver's evidence in the preliminary injunction proceeding is not required to prove [his] entitlement to summary judgment. Byrum, 566 F.3d at 446; see also CHARLES ALAN WRIGHT, ARTHUR R. MILLER, MARY KAY KANE, 11A FEDERAL PRACTICE & PROCEDURE § 2948.3 (2d ed. 1995) (All courts agree that plaintiff must present a prima facie case but need not show that he is certain to win. (footnote omitted)). To assess the likelihood of success on the merits, we look to standards provided by the substantive law. Roho, Inc. v. Marquis, 902 F.2d 356, 358 (5th Cir.1990) (citation omitted). Here, the Receiver contends that there is liability under TUFTA. Under TUFTA, the trial court may find substantial likelihood of success on the merits when it is presented with evidence of intent to defraud the creditor. See Tanguy v. Laux, 259 S.W.3d 851, 858 (Tex. App.Houston [1st Dist.] 2008, no pet.) (citing Tel. Equip. Network, Inc. v. TA/Westchase Place, Ltd., 80 S.W.3d 601, 609 (Tex.App.Houston [1st Dist.] 2002, no pet.)). The Receiver and the Employee Defendants offer competing versions of what evidence is necessary to satisfy TUFTA's requirements. The Bennett Defendants contend that the Receiver failed to establish that Stanford operated as a Ponzi scheme. [8] The FA Defendants argue that because they received their compensation from SGC and not SIB, they did not receive compensation from the Ponzi scheme. The Employee Defendants contend that the district court erred by allowing the Receiver to group all the former employees of Stanford together rather than requiring the Receiver to prove that each individual Defendant received fraudulent transfers of money from the Stanford scheme. Finally, the Employee Defendants also contend that the Receiver failed to follow the heightened pleading requirements of Federal Rule of Civil Procedure 9(b). The Receiver responds that (1) there is sufficient evidence to prove Stanford operated as a Ponzi scheme from the very beginning; (2) the Receiver has presented sufficient evidence to prove that each individual Defendant received transfers of money from the Stanford Ponzi scheme; and (3) this Court does not need to decide whether the Receiver's pleading satisfies the rules, and even if it did, Rule 9(b) does not apply to fraudulent transfer cases. The district court agreed with the Receiver. It found that there was a Ponzi scheme and held that `transfers made from a Ponzi scheme are presumptively made with intent to defraud, because a Ponzi scheme is, as a matter of law, insolvent from inception.' Janvey v. Alguire, No. 3:09-CV-724-N, at 10 (N.D. Tex. June 6, 2010) (order granting preliminary injunction) (quoting Quilling v. Schonsky, 247 Fed.Appx. 583, 586 (5th Cir.2007) (unpublished) (citing Warfield v. Byron, 436 F.3d 551, 559 (5th Cir.2006))). Therefore, the district court found that the Receiver satisfied his obligation to show an actual intent to defraud under TUFTA. The district court further found that the Receiver presented sufficient evidence that the assets implicated by the injunction request represented transfers of Stanford CD proceeds. We address first whether the Receiver presented sufficient evidence that Stanford operated as a Ponzi scheme, then discuss whether the Receiver adequately established that the Employee Defendants received proceeds of a fraudulent transfer, and finally address whether this satisfies the requirements of this element.
The Bennett Defendants spend the bulk of their brief disputing whether Stanford operated as a Ponzi scheme ab initio. The FA Defendants separate SGC from SIB, and claim that the Receiver failed to establish that SGC, the entity that provided compensation to the FA Defendants, was a Ponzi scheme. In large part, the Receiver relies upon the guilty plea of James Davis (the Davis Plea), the former Chief Financial Officer of SIB, to demonstrate that the Stanford enterprise operated as a Ponzi scheme. The district court relied upon the Davis Plea in its order, along with the declarations of the Receiver's forensic accountant, Karyl Van Tassel, to find that a Ponzi scheme existed. We find that the district court did not err in finding that the Stanford enterprise operated as a Ponzi scheme. A Ponzi scheme is a fraudulent investment scheme in which money contributed by later investors generates artificially high dividends or returns for the original investors, whose example attracts even larger investments. BLACK'S LAW DICTIONARY 1198 (8th ed. 2004); see also U.S. v. Setser, 568 F.3d 482, 486 (5th Cir.2009) ([I]n a classic Ponzi scheme, as new investments [come] in ..., some of the new money [is] used to pay earlier investors.). The Second Circuit also provides a good description of a Ponzi scheme: A [P]onzi scheme is a scheme whereby a corporation operates and continues to operate at a loss. The corporation gives the appearance of being profitable by obtaining new investors and using those investments to pay for the high premiums promised to earlier investors. The effect of such a scheme is to put the corporation farther and farther into debt by incurring more and more liability and to give the corporation the false appearance of profitability in order to obtain new investors. Hirsch v. Arthur Andersen & Co., 72 F.3d 1085, 1088 n. 3 (2d Cir.1995). This Circuit has found that a Ponzi scheme is, as a matter of law, insolvent from its inception. Warfield, 436 F.3d at 558 (citing Cunningham v. Brown, 265 U.S. 1, 7-8, 44 S.Ct. 424, 68 L.Ed. 873 (1924)). The Davis Plea and the Van Tassel Declarations provide sufficient evidence to support a conclusion that there is a substantial likelihood of success on the merits that the Stanford enterprise operated as Ponzi scheme. In his plea, Davis, who is singularly positioned to provide insight into the workings of Stanford, admitted that the continued routine false reporting... upon which CD investors routinely relied in making their investment decisions, in effect, created an ever-widening hole between reported assets and actual liabilities, causing the creation of a massive Ponzi scheme whereby CD redemptions ultimately could only be accomplished with new infusions of investor funds. This statement reflects a classic Ponzi scheme and directly contradicts the Bennett Defendants' assertion that the district court relied upon a novel definition of a Ponzi scheme in its order. The Van Tassel Declarations also provide clear, numerical support for the creative reverse engineering undertaken by Stanford executives to accomplish the Ponzi scheme: We found within SIB's accounting records worksheets used to derive fictitious SIB revenues back to 2004. The Ponzi scheme conspirators would simply determine what level of revenues SIB needed to report in order to both look good to investors and regulators and to purport to cover CD obligations and other expenses. They would then back into that total amount by assigning equally fictitious revenue amounts to each category (equity, fixed income, precious metals, alternative) of a fictitious investment allocation. Van Tassel then goes on to specifically itemize how specific returns were based on fictitious asset totals. The Bennett Defendants' argument that the Receiver failed to establish, and that the district court incorrectly assumed, that the Stanford entities constituted a Ponzi scheme ab initio is unavailing. The Davis Plea, when read as a whole, provides sufficient evidence for the district court to assume that the Stanford enterprise constituted a Ponzi scheme ab initio. In outlining the factual basis for the guilty plea, the Davis Plea describes how in 1988, Stanford directed Davis to make false entries into the general ledger for the purpose of reporting false revenues and false investment portfolio balances to the banking regulators shortly after opening Guardian International Bank, as SIB was then known, in Montserrat. The Plea further states that Stanford closed Guardian's operations in Montserrat in 1989 and moved the banking operations to Antigua under the name of SIB to avoid heightened scrutiny from bank regulators in Montserrat. Finally, the FA Defendants' position that SGC should be separated from SIB is of no moment. As made clear by the Van Tassel Declarations, SGC received the bulk of its revenue from commissions for the sale of the SIB CDs and fees for other services it provided to SIB related to the CD investment portfolio. The Receiver seeks to recoup those proceeds because they were the assets of the alleged Ponzi scheme. The district court did not err when it found, for the purposes of this preliminary injunction proceeding, that Stanford operated as a Ponzi scheme.
The Employee Defendants also argue that the district court erred in grouping all the transactions rather than examining evidence of claims against individuals. Contrary to the Employee Defendants' assertion, the district court found that the Receiver came forward with competent evidence that each individual [Employee Defendant] received transfers of money representing CD sale proceeds from the Stanford Ponzi scheme. We agree. The Receiver's evidence is a spreadsheet in the Van Tassel Declarations that lists each former employee, the form of compensation (loan, commission, or quarterly bonus), and the amount that Stanford paid each employee. The Van Tassel Declarations sufficiently establish that Stanford paid the Employee Defendants from the alleged Ponzi scheme for the purposes of the preliminary injunction proceeding.
The district court did not err in finding the Receiver carried his burden of proving a substantial likelihood of success on the merits for his TUFTA claim. TUFTA requires that the debtor transferor make the transfer with actual intent to... defraud any creditor of the debtor. TEX. BUS. & COM.CODE ANN. § 24.005(a)(1). In this circuit, proving that [a transferor] operated as a Ponzi scheme establishes the fraudulent intent behind the transfers it made. SEC v. Res. Dev. Int'l, LLC, 487 F.3d 295, 301 (5th Cir.2007) (citing Warfield, 436 F.3d at 558). In other words, `the transferees' knowing participation is irrelevant under the statute' for purposes of establishing the premise (as opposed to liability for) a fraudulent transfer. Id. (analyzing TUFTA) (quoting Warfield, 436 F.3d at 559 (analyzing Washington state law)). The Receiver carried his burden of proving that he is likely to succeed in his prima facie case by providing sufficient evidence that a Ponzi scheme existed thereby obviating the need to prove fraudulent intent of the transferees and sufficient proof that each individual received transfers of money from the Ponzi scheme. The Defendants did not refute this by showing that they are likely to succeed in proving a TUFTA statutory affirmative defense. Consequently, the district court did not err in finding a substantial likelihood of success. The parties dispute whether Rule 9(b) applies to this case and whether this affects the district court's finding of a substantial likelihood of success. The Employee Defendants argue that the Receiver was obligated to abide by Rule 9(b)'s heightened pleading standards for his fraud claims, and that he failed to meet this standard when he lump[ed] together the claims against all former Stanford employees. The Receiver asserts that Rule 9(b) does not apply to fraudulent transfer cases. We need not and do not address the issue of whether heightened pleading is required. As the district court noted in its Preliminary Injunction Order, it has not yet ruled on the defendants' pending motions to dismiss. The only question that the district court had to decide on this element in the preliminary injunction proceeding was whether the Receiver had shown a substantial likelihood of ultimately succeeding on the merits, see Doe v. Marshall, 622 F.2d 118, 119 n. 2 (5th Cir. 1980), potential procedural hurdles notwithstanding. The Receiver carried this burden.
The Employee Defendants argue that the Receiver did not carry his burden of proving the second element of the preliminary injunction standard: threat of irreparable harm. The Employee Defendants argue that because the Receiver merely seeks a return of the fraudulently transferred CD proceeds, there is no threat of irreparable harm. The Employee Defendants contend that difficulty securing economic damages is insufficient to demonstrate irreparable harm. The Employee Defendants further argue that the Receiver was required to establish a likelihood that each individual defendant would remove or dissipate the frozen assets but for a preliminary injunction. The Receiver replies that TUFTA itself creates a presumption of dissipation. The Receiver then argues that its inability to collect a money judgment should the Employee Defendants dissipate the frozen accounts is sufficient to show a threat of irreparable harm. Finally, the Receiver agrees with the district court that he is not required to make an individualized showing of likely dissipation. The district court found that dissipation of the assets that are the subject of this suit ... would impair the Court's ability to grant an effective remedy, particularly because much of the relief the Receiver seeks under TUFTA is equitable in nature and involves the assets that are ... frozen. The district court further held that the Receiver need not show that each individual defendant would dissipate the frozen assets absent an injunction. The court reasoned that the Receiver was entitled to a presumption that the Employee Defendants would dissipate the frozen assets absent a preliminary injunction because the assets were fraudulently transferred as part of a Ponzi scheme. We find that the Receiver carried his burden of proving this element. To satisfy the second element of the preliminary injunction standard, the Receiver must demonstrate that if the district court denied the grant of a preliminary injunction, irreparable harm would result. Holland Am. Ins. Co. v. Succession of Roy, 777 F.2d 992, 997 (5th Cir. 1985). [9] In general, a harm is irreparable where there is no adequate remedy at law, such as monetary damages. Deerfield Med. Ctr. v. City of Deerfield Beach, 661 F.2d 328, 338 (5th Cir. Unit B 1981); Parks v. Dunlop, 517 F.2d 785, 787 (5th Cir.1975). However, the mere fact that economic damages may be available does not always mean that a remedy at law is adequate. For example, some courts have found that a remedy at law is inadequate if legal redress may be obtained only by pursuing a multiplicity of actions. See, e.g., Lee v. Bickell, 292 U.S. 415, 421, 54 S.Ct. 727, 78 L.Ed. 1337 (1934) (we are not in doubt, the multiplicity of actions necessary for redress at law [is] sufficient... to uphold the remedy by injunction). We have previously stated that where a district court has determined that a meaningful decision on the merits would be impossible without an injunction, the district court may maintain the status quo and issue a preliminary injunction to protect a remedy, including a damages remedy, when the freezing of the assets is limited to the property in dispute or its direct, traceable proceeds. See Productos Carnic, S.A. v. Cent. Amer. Beef & Seafood Trading Co., 621 F.2d 683, 686-87 (5th Cir.1980) ([E]ven were [plaintiff's] remedy limited to damages, an injunction may issue to protect that remedy.). Finally, a showing of [s]peculative injury is not sufficient; there must be more than an unfounded fear on the part of the applicant. Id. (citing Carter v. Heard, 593 F.2d 10, 12 (5th Cir.1979)). We agree with the district court that the Receiver carried his burden of proving this element. First, we agree with the district court that the Receiver successfully show[ed] that the threatened harmdissipation of the assets that are the subject of this suitwould impair the [district court's] ability to grant an effective remedy. The relief that the Receiver ultimately seeks is equitable in nature; the Receiver seeks avoidance of the transfer or obligation to the extent necessary to satisfy the creditor's claim. TEX. BUS. & COM.CODE § 24.008(a)(1). In his complaint, the Receiver asks the court for an order (1) establishing that the CD proceeds received by the Employee Defendants are property of the Receivership Estate held pursuant to a constructive trust for the benefit of the creditors, and (2) allowing him to withdraw proceeds from the segregated escrow account and add them to the Receivership Estate. He does not seek damages for breach of contract or tort. If the defendants were to dissipate or transfer these assets out of the jurisdiction, the district court would not be able to grant the effective remedy, either in equity or in law, that the Receiver seeks. The assets that the Receiver requests stay frozen are assets that are directly traceable to the Stanford Ponzi scheme and are the subject of this dispute. The Receiver merely asks that those assets continue to be held immovable while his case proceeds to judgment. We do not find that the district court erred in determining that a preliminary injunction was appropriate to protect against monetary asset dissipation. The party seeking a preliminary injunction must also show that the threatened harm is more than mere speculation. Succession of Roy, 777 F.2d at 997. Here, the Receiver provided evidence of a massive Ponzi scheme and proof that each individual received proceeds from the fraudulent scheme. This is sufficient to prove the likelihood of each individual removing or dissipating the frozen assets but for the preliminary injunction. Accordingly, we find that the district court did not err in finding that irreparable harm would result in the absence of a preliminary injunction.
On these elements, the district court weighed the interests of the Employee Defendants against the interests represented by the Receiver ( i.e., the interests of the creditors) and looked to the broader ramifications of any potential recovery by the Receiver. The district court noted the extremely limited array of assets remaining to provide compensation to Stanford Ponzi scheme victims. The record supports the fact that Stanford, when it entered receivership, was grossly undercapitalized. Additionally, the Receiver and the Employee Defendants reached consent agreements to thaw all but certain discrete categories of compensation. These last elements of the district court's preliminary injunction analysis implicate the discretion of that court to craft a remedy and weigh the evidence. We do not believe that the district court abused its discretion when it found that these elements weighed in favor of the Receiver.