Court Opinion

ID: 4125934
Source: CourtListenerOpinion
Date Created: 2017-02-14 20:06:09.275357+00
Date Added: 2024-06-11T14:50:08.842673
License: Public Domain

COLORADO COURT OF APPEALS                                        2017COA13
_______________________________________________________________________________

Court of Appeals No. 13CA0239
City and County of Denver District Court No. 12CV1699
Honorable Edward D. Bronfin, Judge
_______________________________________________________________________________

C. Randel Lewis, solely in his capacity as Receiver,

Plaintiff-Appellee and Cross-Appellant,

v.

Steve Taylor,

Defendant-Appellant and Cross-Appellee.
_______________________________________________________________________________

                 JUDGMENT REVERSED, ORDER VACATED,
                 AND CASE REMANDED WITH DIRECTIONS

                                  Division IV
                          Opinion by JUDGE ASHBY
                         Freyre and Nieto*, JJ., concur

                         Announced February 9, 2017
_______________________________________________________________________________

Lindquist & Vennum PLLP, Michael T. Gilbert, John C. Smiley, Theodore J.
Hartl, Denver, Colorado, for Plaintiff-Appellee and Cross-Appellant

Podoll & Podoll, P.C., Richard B. Podoll, Robert A. Kitsmiller, Dustin J. Priebe,
Greenwood Village, Colorado, for Defendant-Appellant and Cross-Appellee

*Sitting by assignment of the Chief Justice under provisions of Colo. Const. art.
VI, § 5(3), and § 24-51-1105, C.R.S. 2016.
¶1    Following remand instructions from the supreme court, we are

 again presented with an issue of first impression in Colorado. We

 must now decide whether the Colorado Uniform Fraudulent

 Transfer Act (CUFTA) requires an innocent investor who profited

 from his investment in a Ponzi scheme to return all funds in excess

 of his principal investment. We conclude that such an innocent

 investor may be entitled to keep some of the funds exceeding the

 amount of his principal.

                             I. Background

¶2    In 2006, defendant, Steve Taylor, invested three million dollars

 in a hedge fund run by Sean Mueller, a licensed securities broker.

 During the period of his investment, Taylor received a series of

 payments from the fund. Taylor withdrew all of his money in 2007,

 about one year after investing, and made a profit of over $487,000.

¶3    In 2010, the Colorado Securities Commissioner discovered

 that the hedge fund was a Ponzi scheme and Mueller was convicted

 of various criminal offenses. The district court appointed plaintiff,

 C. Randel Lewis, as receiver to collect and distribute Mueller’s

 assets to the creditors and investors he defrauded through the

                                   1
 Ponzi scheme.1 Lewis filed a claim under CUFTA seeking to void the

 transfer of the over $487,000 in net profits that Taylor received

 from Mueller’s fund.

¶4    Both Lewis and Taylor moved the district court for summary

 judgment. Taylor argued that (1) the CUFTA claim was filed outside

 the statutory time period and (2) even if the claim was timely, his

 net profits were not recoverable under CUFTA because he was an

 innocent investor. Lewis argued that the claim was timely filed and

 that CUFTA required Taylor to return his net profits. The district

 court agreed with Lewis on both issues and granted him summary

 judgment.

¶5    Taylor appealed. A division of this court held that the district

 court erred by ruling that the claim was timely and reversed the

 district court’s grant of summary judgment on that ground. Lewis

 v. Taylor, 2014 COA 27M, ¶ 8. Based on this conclusion, the

 division did not address whether CUFTA required Taylor to return

 his net profits.

 1 A “Ponzi scheme” is a fraudulent investment scheme in which
 investors are paid from the principal amounts invested by later
 investors.
                                   2
¶6    Lewis appealed the division’s decision to our supreme court.

 The supreme court reversed the division’s opinion, reinstated the

 district court’s ruling that the CUFTA claim was timely, and

 remanded the case to this court to “consider the alternate argument

 on which [Taylor] appealed the trial court’s order.” Lewis v. Taylor,

 2016 CO 48, ¶ 39. We therefore now address whether CUFTA

 requires Taylor to relinquish any amount of money exceeding his

 principal investment in the Ponzi scheme.

                     II. CUFTA and Ponzi Schemes

¶7    Taylor argues that the district court erred by ruling that even

 though he was an innocent investor in Mueller’s fund, CUFTA

 nevertheless required him to return all of the payments from the

 fund in excess of his principal investment. We review an order

 granting summary judgment de novo, applying the same legal

 principles as the district court. See Hamon Contractors, Inc. v.

 Carter & Burgess, Inc., 229 P.3d 282, 290 (Colo. App. 2009).

¶8    Granting summary judgment is proper “when the pleadings

 and supporting documentation demonstrate that no genuine issue

 of material fact exists and that the moving party is entitled to

 judgment as a matter of law.” Credit Serv. Co., Inc. v. Dauwe, 134

                                    3
P.3d 444, 445 (Colo. App. 2005). We, like the district court, give the

  nonmoving party the benefit of all favorable inferences from the

  undisputed facts. Id.

¶9     The CUFTA provision under which Lewis brought his claim,

  section 38-8-105(1)(a), C.R.S. 2016, provides that “[a] transfer made

  . . . by a debtor is fraudulent as to a creditor . . . if the debtor made

  the transfer . . . . [w]ith actual intent to hinder, delay, or defraud

  any creditor of the debtor.” The parties do not dispute that (1)

  Mueller’s fund was Taylor’s debtor based on Taylor’s three million

  dollar investment in the fund and (2) any transfers from the fund to

  Taylor were fraudulent under section 38-8-105(1)(a).

¶ 10   However, CUFTA also provides that “[a] transfer . . . is not

  voidable under section 38-8-105(1)(a) against a person who took in

  good faith and for a reasonably equivalent value.” § 38-8-109(1),

  C.R.S. 2016. The parties agree that Taylor was an innocent

  investor in the fund and withdrew his principal and profits in good

  faith. They also agree that Taylor gave reasonably equivalent value

  for the return of his principal. But the parties disagree about

  whether Taylor gave reasonably equivalent value in exchange for his

  receipt of the approximately $487,000 in net profits.

                                      4
       A. District Court Misapplied the Term “Reasonably Equivalent
                        Value” in Section 38-8-109(1)

¶ 11    Taylor argues that the district court erred by ruling that, as a

  matter of law, he did not give reasonably equivalent value for

  transfers he received in amounts exceeding his principal

  investment. We agree.

¶ 12    The meaning of “reasonably equivalent value” is a question of

  statutory interpretation that we review de novo. See Fischbach v.

  Holzberlein, 215 P.3d 407, 409 (Colo. App. 2009). If the language of

  the statute is clear and unambiguous, we give effect to its plain and

  ordinary meaning. See Fleury v. IntraWest Winter Park Operations

  Corp., 2014 COA 13, ¶ 7, aff’d, 2016 CO 41.

¶ 13    Whether a party has given reasonably equivalent value in

  exchange for a transfer is a mixed question of law and fact that

  requires a court to apply the proper definition of reasonably

  equivalent value to “all the facts and circumstances surrounding

  the transaction.” Schempp v. Lucre Mgmt. Grp., LLC, 18 P.3d 762,

  765 (Colo. App. 2000). Market value is not “wholly synonymous”

  with reasonably equivalent value, but it is an important factor for

  courts to consider. Id.

                                     5
¶ 14   Although no Colorado appellate court has addressed this

  issue, courts in other jurisdictions that have enacted similar

  versions of the Uniform Fraudulent Transfer Act (UFTA) have done

  so. Among the courts that have addressed this issue, two lines of

  opinions have developed. One line holds, as a matter of law, that

  any payout of net profits by a Ponzi scheme operator to an investor

  can never be given in exchange for reasonably equivalent value.

  See, e.g., Donell v. Kowell, 533 F.3d 762, 777 (9th Cir. 2008). The

  other line rejects the idea that, based only on the fraudulent nature

  of the Ponzi scheme, any payout in excess of an innocent investor’s

  principal is necessarily not given in exchange for reasonably

  equivalent value. See, e.g., In re Carrozzella & Richardson, 286 B.R.
480, 490-91 (D. Conn. 2002). Instead, these opinions require

  courts to focus on what was actually given and received in the

  specific transaction between the Ponzi scheme and the investor to

  determine whether the investor gave reasonably equivalent value for

  the net profits. Id.

¶ 15   Lewis, like the district court, relies on opinions from the first

  line of cases. We find that line of cases unpersuasive and now

  explain why.

                                     6
¶ 16   In a widely cited case on which Lewis relies, the Ninth Circuit

  explained that the purpose of the reasonably equivalent value

  requirement in UFTA is to ensure that the only fraudulent transfer

  that is allowed to stand is one that does not deplete the assets of

  the Ponzi scheme and thereby hinder the scheme’s ability to pay

  back innocent investors (creditors). Donell, 533 F.3d at 777. In the

  words of the Ninth Circuit, the “reasonably equivalent value”

  provision exists to “identify transfers made with no rational purpose

  except to avoid creditors.” Id. Transfers that pay innocent

  investors a net profit are made to avoid creditors because “[p]ayouts

  of ‘profits’ made by Ponzi scheme operators are not payments of

  return on investment from an actual business venture. Rather,

  they are payments that deplete the assets of the scheme operator

  for the purpose of creating the appearance of a profitable business

  venture.” Id.

¶ 17   But in a Ponzi scheme, all transfers to investors, whether they

  constitute net profits or repayment of principal, are made with the

  principal of later investors. Because all of these transfers “deplete

  the assets of the scheme operator for the purpose of creating the

  appearance of a profitable business venture,” id., none is supported

                                     7
  by reasonably equivalent value as defined by the Ninth Circuit.

  This is inconsistent with the Ninth Circuit’s ultimate holding that

  transfers repaying principal are supported by reasonably equivalent

  value but transfers of net profits are not.

¶ 18   The Ninth Circuit attempted to mitigate this flaw in its

  analysis by explaining that the return of an innocent investor’s

  principal is nevertheless given for reasonably equivalent value

  because such transfers “are settlements against the defrauded

  investor’s restitution claim.” Id. This rationale is also fraught with

  contradiction. If we consider the value of a defrauded investor’s

  restitution claim, should we not also consider the amount of

  prejudgment interest to which the defrauded investor would be

  entitled? And would this not increase the amount of any such

  settlement so that the value of the settlement is greater than the

  principal investment? These practical issues aside, we conclude

  that it is improper in the first place, when determining what

  constitutes reasonably equivalent value under CUFTA, to consider a

  purely hypothetical restitution claim that an innocent investor

  might have brought and succeeded on had the investor not

  recovered the principal.

                                     8
¶ 19   Other courts have reached the same conclusion as the Ninth

  Circuit by a different, but, in our view, equally questionable route.

  In another widely cited case on which Lewis relies, the Seventh

  Circuit in Scholes v. Lehmann, 56 F.3d 750 (7th Cir. 1995),

  employed an equitable and moral analysis that, we think, strays too

  far from the proper and limited inquiry of whether the innocent

  investor accepted the transfer for reasonably equivalent value. In

  Scholes, an innocent investor invested $2.5 million in, and netted

  almost $300,000 from, what was later discovered to be a Ponzi

  scheme. Id. at 755. The Seventh Circuit’s task was to decide

  whether the Ponzi scheme’s transfer of the net profits to the

  innocent investor violated Illinois’ version of UFTA. Id. at 756. Like

  CUFTA, the Illinois statute provided that a transfer is fraudulent

  and voidable if the transferor makes it “without receiving a

  reasonably equivalent value in exchange.” Id. (quoting 740 Ill.

  Comp. Stat. 160/5(a)(2) (1995)).2

  2 As we understand Scholes, the Seventh Circuit held that its
  reasoning applied equally to Illinois’ pre-UFTA statute and Illinois’
  UFTA statute.
                                      9
¶ 20   The Seventh Circuit began by considering the application of

  the statutory provision in a moral context:

            unless a fair in the sense of equal (or at least
            approximately equal) exchange is insisted
            upon, loopholes are opened in the fraudulent
            conveyance statute that can only be described
            as immoral — a relevant consideration, when
            we consider the equitable origins of the
            concept of fraud. We said that [innocent
            investor’s] profit was supported by
            consideration. But what was the source of the
            profit? A theft by [the Ponzi scheme operator]
            from other investors. What then is [the
            innocent investor’s] moral claim to keep his
            profit? None, even if the intent in paying him
            his profit was not fraudulent.

  Id. at 757. Purportedly returning to the statute it was applying, the

  Seventh Circuit held that the innocent investor was

            entitled to his profit only if the payment of that
            profit to him, which reduced the net assets of
            the estate now administered by the receiver,
            was offset by an equivalent benefit to the
            estate. It was not. A profit is not offset by
            anything; it is the residuum of income that
            remains when costs are netted against
            revenues. The paying out of profits to [the
            innocent investor was] not offset by further
            investments by him conferred no benefit on the
            corporations but merely depleted their
            resources faster.

                                   10
  Id. (citation omitted). With that, the Seventh Circuit held that the

  innocent investor could keep his principal but not the net profit. Id.

  at 757-58.

¶ 21   A significant problem with this analysis is that it ignores the

  fact that the value that an investor gives by investing is not limited

  to the precise dollar amount of the principal investment. The value

  also includes the use of that money for however long it was

  available for investment or any other use. Thus, the Seventh

  Circuit’s analysis “ignore[s] the universally accepted fundamental

  commercial principal [sic] that, when you loan an entity money for a

  period of time in good faith, you have given value.” Carrozzella &

  Richardson, 286 B.R. at 489.

¶ 22   We recognize that in the context of a Ponzi scheme, the

  investors’ principal is not invested as promised, and the time value

  of an innocent investor’s principal does not increase the scheme’s

  net worth. But reasonably equivalent value “include[s] both direct

  and indirect benefits to the transferor, even if the benefit does not

  increase the transferor’s net worth.” Leverage Leasing Co. v. Smith,

  143 P.3d 1164, 1167 (Colo. App. 2006). Regardless of whether a

  Ponzi scheme uses an innocent investor’s money for proper or

                                    11
  fraudulent purposes, it nevertheless receives the benefit of the use

  of that money for a period of time. And the use of that money for a

  period of time has value. See Carrozzella & Richardson, 286 B.R. at

  489.

¶ 23     In addition to the problems with Donell and Scholes identified

  above, we note one more which those opinions have failed to

  resolve. Under Donell, Scholes, and opinions like them, payments

  from a Ponzi scheme to trade creditors like landlords and utility

  companies for legitimately provided services would be subject to

  avoidance if those trade creditors profited at all from the

  transaction. These payments, just like the payment of net profits to

  innocent investors, are funded by the principal invested by other

  investors. This, coupled with the fact that they are made to

  perpetuate the Ponzi scheme, means that they are made with

  “actual intent to hinder, delay, or defraud any creditor” of the

  scheme and are therefore fraudulent. § 38-8-105(1)(a). And even if

  the trade creditors take the payments in good faith, under Donell

  and Scholes, any amount of that payment in excess of the utility

  company’s or landlord’s costs would not be for reasonably

  equivalent value under section 38-8-109(1). See In re Unified

                                     12
  Commercial Capital, Inc., 260 B.R. 343, 352 (Bankr. W.D.N.Y.

  2001); see also Carrozzella & Richardson, 286 B.R. at 490 (citing

  Unified Commercial Capital, 260 B.R. at 352).

¶ 24   Although we find the reasoning in the cases cited by Lewis

  flawed and unpersuasive, we nevertheless recognize that the courts

  that authored them, and the district court here, were motivated by

  the laudable goal of attempting to mitigate the harm to defrauded

  creditors in a fair and equitable manner. But when applying a

  provision in a statute, it is our job to apply the plain and ordinary

  meaning of the words in the statute even when doing so may

  conflict with our own view of what is the most fair or equitable

  result. We suspect that the flaws that we perceive in the analysis of

  the opinions discussed above emanate from an attempt to apply

  fraudulent conveyance statutes to circumstances for which they

  were not legislatively designed. As the court stated in Unified

  Commercial Capital, 260 B.R. at 350,

             [b]y forcing the square peg facts of a “Ponzi”
             scheme into the round holes of the fraudulent
             conveyance statutes in order to accomplish a
             further reallocation and redistribution to
             implement a policy of equality of distribution
             in the name of equity, I believe that many
             courts have done a substantial injustice to

                                    13
             those statues and have made policy decisions
             that should be made by Congress.

¶ 25   We are not the first court to have disagreed with the reasoning

  of cases like Donell and Scholes. The Carrozzella & Richardson

  court, among others, did so too, and identified the fundamental flaw

  in the reasoning of those cases: the improper focus on the overall

  nature and propriety of the transferor’s business rather than, as the

  statute requires, whether the transferor received reasonably

  equivalent value for the transfer. See Carrozzella & Richardson,
286 B.R. at 488-89 (“The statutes and case law do not call for the

  court to assess the impact of an alleged fraudulent transfer in a

  debtor’s overall business.” (quoting In re Churchill Mortg. Inv. Corp.,

  256 B.R. 664, 680 (Bankr. S.D.N.Y. 2000))). As the Carrozzella &

  Richardson court explained, the reasonably equivalent value

  provision in UFTA, which is identical to that in CUFTA, requires “an

  evaluation of the specific consideration exchanged by the

  [transferor] and the transferee in the specific transaction which the

  [receiver] seeks to avoid, and if the transfer is equivalent in value, it

  is not subject to avoidance under the law.” Id. at 489 (quoting

  Churchill, 256 B.R. at 680). We agree with the Carrozzella &

                                     14
  Richardson court that we cannot read a Ponzi scheme exception

  into CUFTA that would allow us to examine the propriety of the

  transferor’s business when determining whether a transferee gave

  reasonably equivalent value for a transfer.

¶ 26   Ultimately, no matter how tempting, we may not look beyond

  the plain language of the statute to decide which transfers from a

  Ponzi scheme are voidable and which are not. The General

  Assembly may wish to revisit this issue and craft a different statute

  that it determines more fairly addresses these circumstances.

  Perhaps it should, especially given that courts have engaged in

  such unconvincing analytical gymnastics to effect equitable

  remedies by way of fraudulent transfer statutes. If it does craft a

  new statute, the General Assembly may wish to consider the

  arguments advanced by cases like Scholes, or equitable principles

  embodied in doctrines such as the clean hands doctrine. See

  Premier Farm Credit, PCA v. W-Cattle, LLC, 155 P.3d 504, 519 (Colo.

  App. 2006) (“[A] party engaging in improper or fraudulent conduct

  relating in some significant way to the subject matter of the cause

  of action may be ineligible for equitable relief.”). But it is not our

  place to apply such equitable principles in circumstances where, as

                                     15
  here, there is an unambiguous statute to apply. Instead, we must

  apply the plain language that the General Assembly chose in

  enacting CUFTA. And section 38-8-109(1), like the rest of CUFTA,

  addresses the propriety of a transfer, not the propriety of the

  transferor’s overall business. Accordingly, any evaluation of what

  constitutes reasonably equivalent value in this case must address

  what was actually exchanged, not how the hedge fund fraudulently

  used whatever it received in the exchange. This evaluation cannot

  ignore the fact that there is value in the use of money for a period of

  time.

¶ 27      We therefore conclude that the district court erred by not

  accounting for the time value of Taylor’s principal investment when

  determining whether he gave reasonably equivalent value under

  section 38-8-109(1) for transfers he received from Mueller’s fund.

                           B. Remand is Necessary

¶ 28      We would normally prefer to give the trial court more specific

  guidance on remand. And, under different circumstances, we might

  have been able to properly apply section 38-8-109(1) ourselves to

  determine which transfers are voidable and which are not. But

  whether “reasonably equivalent value” has been given is a question

                                      16
  of fact. See In re Zeigler, 320 B.R. 362, 374 (Bankr. N.D. Ill. 2005).

  And because the district court did not make findings about any

  individual transfers, we cannot do so and must remand for the

  district court to make additional findings.

¶ 29   Section 38-8-109(1) is unambiguous in describing

  circumstances under which “a transfer” is voidable. The plain and

  ordinary meaning of this section therefore requires courts to decide

  whether individual transfers are voidable. See Fleury, ¶ 7 (when

  interpreting a statute that is clear and unambiguous, we give effect

  to its plain and ordinary meaning).

¶ 30   The district court’s findings of undisputed material facts

  suggested that there were individual transfers, but did not identify

  any of them. The district court found that “[b]etween September 1,

  2006 and April 19, 2007, a total of $3,487,305.29 was paid out to

  Mr. Taylor from the Mueller Funds (the Ponzi scheme). This

  represents a return of all $3 million in principal he invested, plus

  an additional profit of $487,305.29 (‘Net Profit’).” We presume from

  this finding that (1) Taylor received a series of transfers from

  Mueller’s fund and (2) the district court aggregated the value of

  these unidentified individual transfers and then determined that

                                    17
  the portion of the aggregate Taylor received that exceeded his

  principal investment was not, as a matter of law, supported by

  reasonably equivalent value.

¶ 31   This analysis violates the plain language of section 38-8-109(1)

  requiring courts to evaluate whether “[a] transfer” is voidable, not

  whether portions of the aggregate of several transfers are voidable.

  And because the district court’s factual findings do not identify the

  individual transfers, we are unable apply section 38-8-109(1)

  ourselves.

¶ 32   We must therefore remand the case to the district court to

  make additional findings about the individual transfers Taylor

  received from Mueller’s fund and to consider whether Taylor

  received the transfers for reasonably equivalent value.

                             III. Other Issues

¶ 33   Because we reverse the district court’s order granting

  summary judgment, we vacate the court’s order awarding costs and

  interest to Lewis. But because the supreme court’s remand order

  directed us only to “consider the alternate argument on which

  [Taylor] appealed the trial court’s order,” Lewis, 2016 CO 48, ¶ 39,

  we do not address Taylor’s argument that the district court erred by

                                    18
  dismissing his counterclaim for rescission of the investment

  contract with Mueller. We nevertheless note that even if the

  supreme court’s remand order allowed us to consider this

  argument, we could not because the investment contract is not part

  of the record on appeal.

                             IV. Conclusion

¶ 34   The district court’s order granting Lewis summary judgment is

  reversed and the case is remanded to the district court with

  directions to determine whether Taylor received any individual

  transfers for reasonably equivalent value as that term is explained

  in this opinion. Based on that determination, the district court

  should rule on both Taylor’s and Lewis’ motions for summary

  judgment and conduct further proceedings as it deems appropriate.

       JUDGE FREYRE and JUDGE NIETO concur.

                                   19