Opinion ID: 2803670
Heading Depth: 2
Heading Rank: 1

Heading: Jurisdictional Claims

Text: Cornelius makes three jurisdictional challenges. First, he argues the CEA does not grant the district court subject matter jurisdiction to hear state fraudulent transfer claims against third-party recipients of Ponzi scheme funds. Next, he contends Klein lacked standing to assert the UFTA because Winsome was not a legal entity that could maintain its own fraudulent transfer claim. Finally, he claims the district court could not exercise personal jurisdiction over him because he lacked sufficient contacts with Utah. -4-
Cornelius first argues that the CEA does not authorize a receiver to bring state fraudulent transfer claims in federal court against third-party recipients of Ponzi scheme funds. We start with the CEA. Section 13a-1 authorizes the CFTC to bring civil actions in federal court to enjoin violations of the CEA or “to enforce compliance with this chapter, . . . and said courts shall have jurisdiction to entertain such actions.” 7 U.S.C. § 13a-1(a). Among other things, the statute allows a court to prohibit by restraining order the transfer or disposal of assets and to appoint a temporary receiver to administer such an order or “perform such other duties as the court may consider appropriate.” Id; see also SEC v. Vescor Capital Corp., 599 F.3d 1189, 1194 (10th Cir. 2010) (“[T]he district court has broad powers and wide discretion to determine relief in an equity receivership.” (quoting SEC v. Safety Fin. Serv., Inc., 674 F.2d 368, 372–73 (5th Cir. 1982)) (internal quotation marks omitted)). In addition to the CEA, federal law provides receivers a broad grant of authority to sue in federal court to enforce rights over receivership property. 28 U.S.C. § 754. But the statutory scheme does not prevent a receiver from also pursuing state-law claims in federal court. In fact, the general grant of federal question jurisdiction under the CEA brings with it the power to hear “all other claims that are so related to” the original claim as to “form part of the same case or -5- controversy.” 28 U.S.C. § 1367(a). Under this provision and 28 U.S.C. § 754, a receiver may bring ancillary state-law claims against entities alleged to have received unlawful payments. See Peacock v. Thomas, 516 U.S. 349, 356 (1996) (“[W]e have approved the exercise of ancillary jurisdiction over a broad range of supplementary proceedings involving third parties to assist in the protection and enforcement of federal judgments . . . .”); Donell v. Kowell, 533 F.3d 762, 769 (9th Cir. 2008) (holding that § 1367 allowed a receiver to bring a UFTA claim in federal court against a third party under ancillary jurisdiction where the primary lawsuit presented a federal question); Scholes v. Lehmann, 56 F.3d 750, 753 (7th Cir. 1995) (holding that § 1367 allowed a receiver to bring a claim under a state fraudulent transfer act against third parties under ancillary jurisdiction where the primary lawsuit charged the violation of federal securities laws). A suit is ancillary to a receiver’s appointment if it “seeks to accomplish the ends sought and directed by the suit in which the appointment was made.” Eberhard v. Marcu, 530 F.3d 122, 129 (2d Cir. 2008) (quoting Tcherepnin v. Franz, 485 F.2d 1251, 1255–56 (7th Cir. 1973)). Here, the district court enjoined Winsome from violating the CEA and tasked Klein with various responsibilities needed to enforce the injunction. The court not only ordered him to preserve or increase Winsome’s assets, but also empowered him to sue in order to do so—a routine order well within the broad range of remedial functions allowed under § 13a-1. Moreover, it is clear that the -6- state-law claim against Cornelius is ancillary to the court’s injunction against Winsome’s violation of a federal statute, as well as the court’s appointment of Klein to preserve Winsome’s assets and recover improper payments: insofar as Klein alleges that Winsome improperly paid Cornelius, his present claim seeks to accomplish the goals of his appointment. We accordingly conclude the district court had subject matter jurisdiction to resolve Klein’s UFTA claim. 1 In resisting this conclusion, Cornelius argues that any relief against third parties must be achieved through either (1) 7 U.S.C. § 13a-2, which empowers state attorneys general to sue on behalf of their defrauded residents, or (2) 7 U.S.C. § 25, which provides a direct cause of action under the CEA for defrauded investors. But Klein is not acting directly on behalf of Winsome’s investors. He is suing on Winsome’s own behalf. Cornelius next points to the Third Circuit’s decision in CFTC v. American Metals Exchange Corp., 991 F.2d 71, 78 (3d Cir. 1993). He argues it holds that a 1 Cornelius also challenges the district court’s authority to grant equitable relief by ordering him to return the funds, but this argument is without merit. Courts exercising equity jurisdiction have available a full range of equitable remedies. See CFTC v. Wilshire Inv. Mgmt. Corp., 531 F.3d 1339, 1344 (11th Cir. 2008) (holding an “unqualified grant of statutory authority” to issue injunctive relief under the statute also confers authority to issue a “full range of equitable remedies,” including restitution); FTC v. LoanPointe, LLC, 525 F. App’x 696, 699 (10th Cir. 2013) (holding that even though the FTC Act did not expressly authorize courts to grant consumer redress, the grant of authority to provide injunctive relief carried with it “the full range of equitable remedies,” including restitution and disgorgement). -7- receiver cannot seek to benefit defrauded investors by suing on behalf of the entities that defrauded them. But in that case the court only held the district court had miscalculated the amount of monetary relief. Id. at 77–78. In fact, the Third Circuit actually affirmed the district court’s finding that it could impose ancillary relief against a third-party recipient of an unlawful transfer. Id. at 76 (“The district court did not err in imposing the ancillary relief of disgorgement.”). In sum, the district court had subject matter jurisdiction to resolve claims brought under the UFTA on Winsome’s behalf.
Next, Cornelius contends that Klein does not have standing to bring a UFTA claim because Winsome itself cannot bring such a claim. He reasons that because Winsome is unincorporated and was subject to Andres’s control, it is a mere alter-ego for Andres and therefore has no capacity to sue in its own right. Although Cornelius concedes Klein could nonetheless sue as a receiver for Andres’s assets, he argues that Andres himself would not have a UFTA claim against third-party recipients of Winsome’s funds. We disagree with Cornelius’s assertion that Winsome cannot sue in its own right. The UFTA provides rights and remedies for defrauded creditors. See Utah Code Ann. §§ 25-6-5, 25-6-8. But receivers may only sue to redress injuries to the entity in receivership, and not directly on behalf of the entity’s creditors. Scholes, 56 F.3d at 753 (citing Caplin v. Marine Midland Grace Trust Co., 406 -8- U.S. 416 (1972)); see also Janvey v. Democratic Senatorial Campaign Comm., Inc., 712 F.3d 185, 190 (5th Cir. 2013); Marion v. TDI Inc., 591 F.3d 137, 147 (3d Cir. 2010); Wuliger v. Mfrs. Life Ins. Co., 567 F.3d 787, 798–99 (6th Cir. 2009); Eberhard, 530 F.3d at 132; Smith v. Arthur Andersen LLP, 421 F.3d 989, 1002 (9th Cir. 2005); Goodman v. FCC, 182 F.3d 987, 991–92 (D.C. Cir. 1999); Fleming v. Lind-Waldock & Co., 922 F.2d 20, 25 (1st Cir. 1990). The question then becomes whether Winsome itself qualifies as a defrauded creditor under the statute. The answer is yes, a business entity abused by a Ponzi scheme qualifies as a defrauded creditor. A Seventh Circuit case illustrates the point. In Scholes, 56 F.3d at 753, the court considered a state fraudulent transfer act similar to the UFTA. The defendant created corporations that sold interests in limited partnerships. Instead of using the sales’ proceeds for their stated purposes, the corporations, under the defendant’s control, paid various third parties. When a receiver for the corporations sued the third parties to recover the transfers, the third parties argued that because the corporations themselves had made the transfers, the corporations could not have been injured by them. The third parties asserted that the receiver was essentially acting on behalf of the injured creditors (those who had bought interests in the limited partnerships), rather than the corporations the receiver had been authorized to represent. The court disagreed, finding that because the corporations had been “evil zombies” under the defendant’s “spell,” they had been injured. Id. at 754. In essence, the -9- corporations were creditors themselves. See Janvey v. Brown, 767 F.3d 430, 437 (5th Cir. 2014) (holding that entities used by Ponzi schemers to make fraudulent transfers are considered defrauded creditors under the UFTA); Wing v. Dockstader, 482 F. App’x 361, 363 (10th Cir. 2012) (interpreting Scholes to hold that the receiver was a creditor of the scheme). Likewise, Winsome was under Andres’s improper control when he fraudulently transferred its funds, and it was injured in its own right. But Cornelius asserts that unlike the corporations in Scholes, Winsome has no independent existence because it does not fall into any category of business recognized by Texas law and was entirely subject to Andres’s control. He likens Winsome to Andres’s personal bank account. In determining whether an entity has the capacity to sue or be sued, we look to the law of the state in which the district court is located. Fed. R. Civ. P. 17(b)(3). Utah law is contrary to Cornelius’s position. “When two or more persons associated in any business . . . transact such business under a common name . . . they may sue or be sued by such common name.” Utah R. Civ. P. 17(d). Formal legal recognition of the association is unnecessary. See Weber Cnty. v. Ogden Trece, 321 P.3d 1067, 1075–76 (Utah 2013). Under Utah law, Winsome is an association of investors who pooled resources together and transacted business under the common name of Winsome Investment Trust. It had joint venture contracts with the investors on behalf of -10- the Trust, including bank accounts and other indicia of independence and separateness. Over the course of its existence, it made payments to some investors and even had its own website. We thus agree with the district court that Winsome is an independent entity under Utah law and see no impediment for Klein to assert standing on behalf of Winsome to pursue a UFTA claim.
Finally, Cornelius argues that the district court’s exercise of personal jurisdiction violates the Constitution because he was not properly served with a complaint and does not have minimum contacts with the state of Utah. Our case law requires that before “a federal court can assert personal jurisdiction over a defendant in a federal question case, the court must determine (1) whether the applicable statute potentially confers jurisdiction by authorizing service of process on the defendant and (2) whether the exercise of jurisdiction comports with due process.” Peay v. BellSouth Med. Assistance Plan, 205 F.3d 1206, 1209 (10th Cir. 2000) (quoting Republic of Panama v. BCCI Holdings (Lux.) S.A., 119 F.3d 935, 942 (11th Cir. 1997)) (internal quotation marks omitted). As an initial matter, federal law allows nationwide service of process under the CEA. Klein’s claims were based on 28 U.S.C. § 754, which provides that “[a] receiver appointed in any civil action or proceeding involving property . . . -11- situated in different districts” is entitled to “complete jurisdiction and control” of that property, “with the right to take possession thereof.” Section 754 moreover grants receivers the capacity to sue in any federal district court. In addition, 28 U.S.C. § 1692 provides that where a receiver is appointed for property located in different districts, “process may issue and be executed in any such district as if the property lay wholly within one district.” In short, § 754 authorizes receivers properly appointed in one federal district to sue for, and take possession of, property in other districts, and § 1692 extends the appointing court’s territorial reach to all districts in which receivership property is located. Read together, they allow nationwide service of process for receivers pursuing receivership property. SEC v. Ross, 504 F.3d 1130, 1145–46 (9th Cir. 2007); SEC v. Bilzerian, 378 F.3d 1100, 1105–06 (D.C. Cir. 2004); Am. Freedom Train Found. v. Spurney, 747 F.2d 1069, 1073 (1st Cir. 1984); Haile v. Henderson Nat’l Bank, 657 F.2d 816, 823–24 (6th Cir. 1981). Having established that Cornelius is amenable to service of process in a district in which receivership property is located, we still must determine whether suing a Texas defendant in Utah accords with the minimal constitutional requirements of due process. Unlike service of process, “[t]he requirement that a court have personal jurisdiction flows . . . from the Due Process Clause. It represents a restriction on judicial power not as a matter of sovereignty, but as a matter of individual liberty.” Omni Capital Int'l, Ltd. v. Rudolf Wolff & Co., 484 -12- U.S. 97, 104 (quoting Ins. Corp. of Ir. v. Compagnie des Bauxites de Guinee, 456 U.S. 694, 702 (1982)) (internal ellipses and quotation marks omitted). Cornelius asserts that in evaluating his due process claim, we must apply the minimum contacts analysis spelled out in International Shoe Corp. v. Washington. 326 U.S. 310 (1946). International Shoe held that consistent with the Fourteenth Amendment, a state court cannot exercise jurisdiction over a defendant “not present within the territory of the forum” unless the defendant maintains minimum contacts with that state. Id. at 316. Likewise, a federal court cannot exert jurisdiction over a nonresident defendant unless the defendant has minimum contacts with the state in which the court is located. Newsome v. Gallacher, 722 F.3d 1257, 1264 (10th Cir. 2013). But we apply a different standard “in a federal question case where jurisdiction is invoked based on nationwide service of process.” Peay, 205 F.3d at 1212. In Peay, we held that in those circumstances, “the Fifth Amendment requires the plaintiff’s choice of forum to be fair and reasonable to the defendant.” Id. To defeat federal jurisdiction, a defendant must establish that the “chosen forum will make litigation . . . gravely difficult and inconvenient” or, in other words, the forum district burdens the defendant with “constitutionally significant inconvenience.” Id. (internal quotation marks omitted). We look to non-exclusive factors in considering whether defendants have met this burden, such as (1) the extent of contact with the forum state, (2) the inconvenience of -13- having to litigate in a foreign jurisdiction, (3) judicial economy, (4) the probable situs of the discovery proceedings, and (5) the nature of the defendant’s activities and its impact beyond his state’s borders. Id. Even though a Utah entity paid for his legal services, Cornelius maintains he has no other contacts with Utah and thus the court has no personal jurisdiction over him. But like in the district court, Cornelius provides no argument going to the other factors, and the insignificance of contact is only one consideration. While it may not be decisive that Winsome’s payment originated in Utah, Cornelius shoulders the burden of showing constitutionally significant inconvenience created from defending the UFTA claims in Utah. He has not done so. Cornelius asserts in his reply brief that Peay does not apply because he was not a party to the original federal question claim. Although Klein and the district court have relied on Peay throughout these proceedings, Cornelius never made this argument or even addressed Peay in his opening brief. The argument is therefore waived. United States v. Wayne, 591 F.3d 1326, 1336 n.9 (10th Cir. 2010); see also Fed. R. App. P. 28(a)(8)(A). But in any event, the better analysis is that Klein’s UFTA claim is ancillary to the CFTC enforcement action, and that action involves a federal question. The UFTA claim is therefore “part of the same case or controversy” as the federal question claim, 28 U.S.C. § 1367, and is necessary to enforce judgments in the original case. See Peacock, 516 U.S. at -14- 356. And where a district court exercises personal jurisdiction over a defendant for a federal question claim, it may exercise personal jurisdiction over that same defendant for a supplemental state-law claim. United States v. Botefuhr, 309 F.3d 1263, 1272 (10th Cir. 2002). Other courts have gone a step further, holding that where a receiver enjoys nationwide service of process and properly serves an outof-state defendant, who was not a party to the federal question suit, for an ancillary claim, the court has personal jurisdiction over that defendant. See Haile, 657 F.2d at 821, 826; see also SEC v. Vision Commc’ns, 74 F.3d 287, 291 (D.C. Cir. 1996) (holding that had the receiver complied with the filing requirements of § 754, so as to establish control over state contract rights in a foreign district, “the court might then have been able to enjoin [foreign] nonparties [to the original federal question action] . . . from interfering with the court’s receiver’s control” over those rights). But because Cornelius has waived any argument to the contrary, we need not resolve this issue in this case. Next, Cornelius makes a statutory argument, contending that §§ 754 and 1692 do not confer in personam jurisdiction over him. He contends that only an in rem claim against the receivership property can be maintained in the district where the property is located—here, the legal fees paid to Cornelius in Texas. He points to a First Circuit case, American Freedom Train Foundation, 747 F.2d at 1073–74, but that case is readily distinguishable since the receiver there had not served proper process on the out-of-state defendants, id. at 1072. In direct -15- contrast to Cornelius’s position, the court actually concluded that “minimum contacts analysis . . . is simply inapposite” where § 754 and § 1692 are satisfied. Id. at 1073 (quoting Haile, 657 F.2d at 826). 2 Similarly, he relies on Gilchrist v. General Electric Capital Corp., 262 F.3d 295, 301 (4th Cir. 2001), for the proposition that “in rem jurisdiction over property in other districts does not give a district court personal jurisdiction over persons in such other districts absent an express congressional grant of personal jurisdiction.” But Gilchrist is unpersuasive because that case did not consider § 1692 and its express congressional grant of personal jurisdiction. In sum, §§ 754 and 1692 establish nationwide service of process for Klein’s UFTA claims, and Cornelius has not shown his due process rights are violated by having to defend himself in the District of Utah. Accordingly, the district court properly exercised personal jurisdiction over Cornelius.