Court Opinion

ID: 4354144
Source: CourtListenerOpinion
Date Created: 2018-12-24 21:00:45.602996+00
Date Added: 2024-06-11T14:46:13.422026
License: Public Domain

NOT FOR PUBLICATION                           FILED
                    UNITED STATES COURT OF APPEALS                       DEC 24 2018
                                                                      MOLLY C. DWYER, CLERK
                                                                       U.S. COURT OF APPEALS
                           FOR THE NINTH CIRCUIT

WILLIAM J. HOFFMAN,                             No.    17-56290

                Plaintiff-Appellee,             D.C. No.
                                                2:16-cv-01972-SJO-FFM
 v.

HOWARD MARKOWITZ,                               MEMORANDUM*

                Defendant-Appellant,

                   Appeal from the United States District Court
                       for the Central District of California
                    S. James Otero, District Judge, Presiding

                     Argued and Submitted December 4, 2018
                              Pasadena, California

Before: D.W. NELSON and WARDLAW, Circuit Judges, and PRATT,** District
Judge.

      Nationwide Automated Systems, Inc. (NASI), a Ponzi scheme, paid

Defendant-Appellant Howard Markowitz referral fees for referring family, friends,

and others to the scheme. On appeal, Markowitz challenges the district court’s

      *
             This disposition is not appropriate for publication and is not precedent
except as provided by Ninth Circuit Rule 36-3.
      **
            The Honorable Robert W. Pratt, United States District Judge for the
Southern District of Iowa, sitting by designation.
partial summary judgment order in favor of Plaintiff-Appellee William Hoffman,

the appointed receiver (the Receiver) in the Securities and Exchange Commission

(SEC) action against NASI. We affirm the district court’s partial summary

judgment order, which concluded that the Receiver could void and disgorge

Markowitz’s referral fees under the California Uniform Voidable Transactions Act

(CUVTA).

      The parties do not dispute the following underlying facts. NASI was a Ponzi

scheme that raised funds through the purported sale of automated teller machines

(ATMs) to investors with the promise of guaranteed returns. The ATMs, however,

were fictitious, and the purported returns came from funds raised through later

investors.

      Markowitz was a long-time investor in NASI. He believed it was a

legitimate company. In addition to investing his own money in the company,

Markowitz referred others to the company. For this service, NASI paid Markowitz

referral fees totaling nearly $750,000.

      In 2014, the SEC filed a civil action against NASI, its affiliates, and its

principals for securities fraud. In the SEC action, the court appointed Hoffman as

receiver of NASI. Under the CUVTA, the Receiver requested that the district

court void and disgorge Markowitz’s referral fees. The district court granted the

Receiver’s motion for partial summary judgment on the issue.

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      “We review a district court’s grant of summary judgment de novo” to

determine “whether there are any genuine issues of material fact and whether the

district court correctly applied the relevant substantive law.” Oklevueha Native

Am. Church of Haw., Inc. v. Lynch, 828 F.3d 1012, 1015 (9th Cir. 2016) (citation

omitted). We view facts “‘as a whole’ and ‘in the light most favorable to the party

opposing the motion.’” Pavoni v. Chrysler Grp., 789 F.3d 1095, 1098 (9th Cir.

2015) (quoting Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 10 475 U.S.

574, 587 (1986)).

      Under the CUVTA, a payment made by a Ponzi scheme to a third party is

voidable when made with (1) actual intent to defraud, or (2) constructive intent to

defraud based on the lack of “reasonably equivalent value” provided in exchange

for a payment. Cal. Civ. Code § 3439.04(a); see also Donell v. Kowell, 533 F.3d

762, 770–71 (9th Cir. 2008). A third party can rebut this presumption by showing

that it received the payment “in good faith” and “provided reasonably equivalent

value” to the scheme for the payment. Cal. Civ. Code § 3439.08(a).

      Here, the question is whether NASI’s payments to Markowitz for investor

referrals are voidable under the CUVTA. Markowitz argues the referral fees are

not voidable because (1) he acted in good faith when referring investors to NASI

and (2) his referral services provided reasonably equivalent value to NASI in

exchange for the referral fees. The Receiver disagrees, arguing that Markowitz’s

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referral fees are voidable because Markowitz’s referral services provided no value

to NASI investors. From the viewpoint of NASI’s losing investors (the creditors),

the Receiver argues that Markowitz’s investment referrals only created new

liabilities for investors and that the net effect was to deepen NASI’s insolvency

with each referred investment. Markowitz, the Receiver, and the district court all

agree, however, that the issue of whether payments for referral services provided to

a Ponzi scheme are voidable is unsettled in the Ninth Circuit.

      We have not yet addressed whether payments by a Ponzi scheme for referral

services are voidable. Moreover, there is no consensus in other circuits. Compare

In re Fin. Federated Title & Trust, Inc., 309 F.3d 1325 (11th Cir. 2002) (holding

that there is no per se rule that services furthering a Ponzi scheme are without

value), with Warfield v. Byron, 436 F.3d 551 (5th Cir. 2006) (holding that referral

services for a Ponzi scheme provided no value to the scheme as a matter of law).

      We need not reach the question of whether referrals to a Ponzi scheme are

per se voidable because they never provide value. We find, however, that the

reasoning in Warfield compels the result in this case. Markowitz concedes that the

only service he provided in exchange for referral fees was to refer others to the

Ponzi scheme. On this set of facts, we conclude that Markowitz’s referral fees do

not constitute “reasonably equivalent value” and are thus subject to disgorgement.

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      Accordingly, we AFFIRM the district court’s partial summary judgment

order in favor of the Receiver.

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                                                                              FILED
Hoffman v. Markowitz, 17-56290
                                                                               DEC 24 2018
D.W. NELSON, Circuit Judge, concurring:                                    MOLLY C. DWYER, CLERK
                                                                            U.S. COURT OF APPEALS

      I concur in the result and write separately because I would hold that when a

third-party receives payment in exchange for referring investors to a Ponzi scheme,

the payments are per se voidable because investor referrals do not provide value to

the Ponzi scheme. Rather, each referral increases the Ponzi scheme’s liabilities and

its inevitable insolvency. See Warfield v. Byron, 436 F.3d 551, 560 (5th Cir. 2006).

This reasoning is consistent with both the California Uniform Voidable

Transaction Act (CUVTA) and the California Supreme Court’s instruction that

courts analyze the issue of value provided from the standpoint of a creditor, not the

debtor. See Hansen v. Cramer, 39 Cal. 2d 321, 324 (1952).

      Markowitz’s slippery slope argument is unpersuasive because it fails to

recognize the material differences between an ordinary vendor (e.g., landlord,

utility company, or shipping service) and a third-party agent paid to recruit new

investors to a Ponzi scheme, like Markowitz. While ordinary vendor services

technically allow the Ponzi scheme to continue, the connection between those

services and increased creditor liability is indirect and attenuated. For example,

while a vendor like FedEx may assist a Ponzi scheme’s operations through its

shipping services; those services do not inherently increase the scheme’s liabilities

to its investors/creditors. Contrarily, investor referrals directly create increased

creditor liabilities and lead to the scheme’s eventual insolvency.
       Accordingly, I would hold that Markowitz’s referral fees are voidable under

the CUVTA, because referral services—as a matter of law—do not provide value

to a Ponzi scheme’s investors/creditors.

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