Court Opinion

ID: 50240
Source: CourtListenerOpinion
Date Created: 2010-04-26 00:48:17+00
Date Added: 2024-06-11T09:39:17.318891
License: Public Domain

United States Court of Appeals
                                                                 Fifth Circuit
                                                               F I L E D
                        REVISED May 31, 2007
                                                                 May 18, 2007
              IN THE UNITED STATES COURT OF APPEALS
                                                            Charles R. Fulbruge III
                        FOR THE FIFTH CIRCUIT                       Clerk
                        _____________________

                             No. 05-10597
                          consolidated with
                             No. 05-11484
                        _____________________

SECURITIES AND EXCHANGE COMMISSION; ET AL.,

                                                            Plaintiffs,

LAWRENCE J. WARFIELD, as Receiver for International Education
Research Corporation,

                                                 Plaintiff-Appellee,

                                 versus

RESOURCE DEVELOPMENT INTERNATIONAL LLC; ET AL.,

                                                            Defendants,

M&M ENGRAVING AND MANUFACTURING CO.; ANTHONY MARTELLA,

                                           Defendants-Appellants.
_________________________________________________________________

           Appeal from the United States District Court
            for the Northern District of Texas, Dallas
_________________________________________________________________

Before JONES, Chief Judge, and JOLLY and STEWART, Circuit Judges.

E. GRADY JOLLY, Circuit Judge:

     After   Benjamin   Cook’s   (“Cook”)   assets   were    frozen     in

conjunction with a pending lawsuit by the Securities and Exchange

Commission, Anthony Martella (“Martella”) agreed with Cook to pay

Cook’s lawyers $60,000 from his company’s corporate account in

exchange for immediate reimbursement arranged by Cook. Immediately
after   completing     the     payments       to   Cook’s     lawyers,         Martella’s

company, M&M Engraving and Manufacturing Co. (“M&M”), received a

wire transfer from International Education Research Corporation

(“IERC”) for the identical amount. IERC was subsequently placed in

receivership.       The receiver, Warfield, sued Martella and M&M

seeking return of the $60,000 payment that M&M had received from

IREC on a theory of fraudulent transfer.               After a bench trial, the

district court concluded that the $60,000 payment was a fraudulent

transfer and found Martella and M&M jointly and severally liable

for its repayment.      The district court declared that the judgment

would be nondischargeable in bankruptcy.

        On appeal Martella and M&M (collectively “the Defendants”)

challenge    the    district       court’s     holdings     as    to    liability      and

nondischargeability.         The    receiver       concedes      that    the     district

court’s ruling on nondischargeability in bankruptcy was premature

and we agree.      Finding no merit to the Defendants’ other arguments,

we AFFIRM the monetary judgment and VACATE the order declaring

nondischargeability of the judgment in bankruptcy.

                                          I.

     This appeal is an appendage of two lawsuits filed by the

Securities    and    Exchange      Commission       (“SEC”)      to     shut    down   two

fraudulent prime bank trading programs.                   In March 1999, the SEC

initiated a lawsuit (“SEC v. Cook”) alleging that Cook and several

other defendants were engaged in a complex Ponzi scheme (the

“Dennel Program”). In the backdrop to this particular lawsuit, the

                                          2
district court issued a Receivership Order designed to protect any

remaining assets to reimburse the investors defrauded by the Dennel

Program.   The court appointed Lawrence J. Warfield (“Warfield”) as

receiver. The court also issued a temporary restraining order that

prohibited Cook or any person or entity cooperating with him from

           directly or indirectly, making any payment or
           expenditure of funds, incurring any additional
           liability   (including,    specifically,   any
           advances on any line of credit), or effecting
           any sale, gift, hypothecation or other
           disposition of any asset, pending defendants
           providing sufficient proof to the Court that
           they have sufficient funds or assets to
           satisfy all claims arising from the violations
           of the federal securities laws alleged in the
           SEC’s complaint.

The court subsequently entered a preliminary injunction with the

same terms.

     Martella is the sole shareholder and sole director of M&M.

Martella is also a long-time friend and business associate of Cook.

M&M had    invested   more   than   $600,000   with   the   Dennel   Program

directly, and about $237,000 with the Dennel Program through its

pension plan.     After his assets and those under his control were

frozen, Cook was unable to pay his attorneys.         Cook asked Martella

to pay his attorneys in exchange for immediate reimbursement.            On

March 31, 1999 and April 8, 1999, Martella personally delivered two

checks, in the amounts of $10,000 and $50,000, to Cook’s attorneys.

These checks were drawn on M&M’s Chase Bank checking account.            On

April 9, 1999, IERC wired $60,000 from its U.S. Bank of Nevada

account to M&M.   At the time the $50,000 check was issued to Cook’s

                                     3
attorneys,    M&M’s   checking   account   would       not   have   contained

sufficient funds to pay it, but for the wire transfer from IERC.

     In March 2002, the SEC filed a second lawsuit (“SEC v. RDI”)

against another set of defendants led by James and David Edwards.

The defendants in this lawsuit included IERC, Resource Development

Institute, LLC, (“RDI”), and other entities. The complaint alleged

that the RDI prime bank trading program (“RDI Program”) had its

genesis in the Dennel Program, and that James and David Edwards,

and their co-defendants, had developed the RDI Program to replace

the Dennel Program after the SEC shut it down.           The district court

also entered a Receivership Order with respect to these defendants

and again appointed Warfield as receiver.

     After discovering the 1999 wire transfer from IERC to M&M,

Warfield filed    suit   on   December   20,   2002,    claiming    that   the

transfer of funds from IERC to M&M was fraudulent under the Uniform

Fraudulent Transfer Act. Warfield also contended that Martella and

M&M’s failure to return the funds to him constituted wrongful

conversion.     Finally, Warfield alleged that Martella and M&M

conspired with Cook and the Edwards Defendants to defraud the IERC,

the Receivership Entities, and their investors. Warfield requested

equitable disgorgement to prevent Martella and M&M from being

unjustly enriched by their fraudulent acts -- and joint and several

liability as between the two defendants on the theory that Martella

used M&M to perpetrate fraud and that the court should hold him

personally accountable.

                                    4
       The case was tried before the district court beginning on

January 10, 2005.         On January 26, 2005, the district court entered

its findings of facts and conclusions of law.              The court found that

Martella, knowing that Cook’s accounts were frozen, agreed to make

payments to Cook’s counsel in exchange for immediate reimbursement.

After      Martella     delivered   two    checks   to   Cook’s   lawyers,     this

transaction was completed when he was reimbursed by a wire transfer

from IERC.         Martella and M&M were aware or reasonably should have

been       aware   of   the   court’s   order   freezing    Cook’s    assets    and

restricting the disposition of assets within his control.

       In the same order, the court determined that:                  IERC was an

entity created to perpetuate an illegal Ponzi scheme; all of its

assets resulted from fraudulent activities; on April 9, 1999, when

IERC transferred $60,000 to defendant M&M, IERC was insolvent; M&M

gave no       reasonably      equivalent   value    to   IERC   for   the   $60,000

transfer; IERC made the transfer and M&M received the monies to

hinder enforcement of the Court’s orders freezing Cook’s accounts

and restricting the disposition of his assets, and to further

perpetuate the fraud on Dennel’s investors; and in using M&M for

this money laundering transaction, Martella utilized his control

over the corporation for an illegal purpose (violation of the

court’s orders) and to continue the fraudulent Dennel Program.1

       1
        Although fraud is more commonly “perpetrated” than
“perpetuated,” in this case, the district court specifically found
that the IERC was created to perpetuate the fraudulent Ponzi scheme
after the SEC shut down its predecessor, the Dennel Trading

                                           5
     On the basis of these findings, the district court concluded

that:    IERC’s April 9, 1999 wire transfer of $60,000 to defendant

M&M was a fraudulent transfer under § 24.005(a)(1) of the Texas

Business and Commerce Code; the $60,000 payment constituted an

unjust    enrichment   that   the   Defendants   should   be   required   to

disgorge; and M&M was the alter ego of Martella, with respect to

the $60,000 payment.     Finally, the court rejected the Defendants’

asserted affirmative defenses of offset, “good faith,” waiver, and

laches.

     The district court entered a final judgment granting Warfield

joint and seyveral recovery from M&M and Martella in the amount of

$60,000 plus pre-judgment interest and costs.             The court also

declared that the judgment against the Defendants could not be

discharged in bankruptcy.2      The Defendants filed a Motion for New

Trial on February 3, 2005, which the court denied on April 4, 2005.

The Defendants timely appealed the Judgment and the denial of the

Motion for New Trial.3

                                     II.

Program.
     2
      The final judgment was entered on January 24, 2005, two days
prior to the findings of fact and conclusions of law.
     3
       On November 8, 2005, while this appeal was pending, the
Defendants filed a Motion for Relief From Judgment under Federal
Rule of Civil Procedure 60, claiming that the $60,000 RDI
Receivership claim should be set off against $167,543.00 that M&M
reinvested with the Rivera Breach Trust 410, which they alleged was
another RDI receivership entity. The district court denied this
motion and Defendants have appealed. This appeal is not before us.

                                      6
      On appeal, the Defendants argue that the district court erred

in   finding   that   the   wire   transfer   of   $60,000   constituted   a

fraudulent transfer under § 24.005(a)(1).            The Defendants also

contend that the district court erred in finding that the $60,000

payment constituted an unjust enrichment, and in holding that

Martella could be held jointly and severally liable with M&M under

the alter ego theory of liability.             In the alternative, the

Defendants argue that the court erred in denying their good faith

defense.   Finally, the Defendants argue that the District Court

erred in holding that the final judgment may not be discharged in

bankruptcy.

                                     A.

      We first consider whether the district court erred in finding

that the payment constituted a fraudulent transfer under the Texas

Business and Commerce Code, § 24.005(a)(1).          The Uniform Fraudulent

Transfer Act as adopted by Texas provides that:

           A transfer ... incurred by a debtor is
           fraudulent as to a creditor, whether the
           creditor’s claim arose before or within a
           reasonable time after the transfer was made,
           ... if the debtor made a transfer or incurred
           the obligation: (1) with actual intent to
           hinder, delay, or defraud any creditor of the
           debtor; or (2) without receiving a reasonably
           equivalent value in exchange for the transfer
           or obligation, and the debtor: (A) was engaged
           or was about to engage in a business or a
           transaction for which the remaining assets of
           the debtor were unreasonably small in relation
           to the business or transaction; or (B)
           intended to incur, or believed or reasonably
           believed that the debtor would incur, debts

                                      7
            beyond the debtor’s ability to pay as they
            became due.

TEX. BUS. & COMM. CODE ANN.           §    24.005(a).      The   district     court

explicitly     held   that    the     transfer      was   fraudulent       under   §

24.005(a)(1), as a transfer made “with actual intent to hinder,

delay, or defraud any creditor of the debtor.”4                    The district

court’s underlying findings of fact will be upheld unless they are

clearly erroneous, while its legal conclusions are reviewed de

novo.    Chandler v. City of Dallas, 958 F.2d 85, 89 (5th Cir. 2002).

     The Defendants argue that the district court’s determination

that the $60,000 transfer was fraudulent under § 24.005(a)(1) was

erroneous because Warfield provided no evidence to support a

finding of actual intent on the part of the Defendants.                    Contrary

to the Defendants’ assertions, however, “the transferees’ knowing

participation is irrelevant under the statute” for purposes of

establishing    the   premise    of       (as   opposed   to   liability    for) a

fraudulent transfer.         Warfield v. Byron, 436 F.3d 551, 559 (5th

Cir. 2006) (Jones, C.J.).5       The statute requires only a finding of

     4
       It appears that the district court also intended to hold
that the transfer was fraudulent under § 24.005(a)(2), but due to
an apparent scrivener’s error failed to do so. The first two
conclusions of law in the district court’s opinion are identical.
This court can, in any event, uphold the judgment on any basis
supported by the record. Zuspann v. Brown, 60 F.3d 1156, 1160 (5th
Cir. 1995).
     5
      In Byron, the court was reviewing Washington State law. 436
F.3d at 557.    However, the relevant language of the provision
analyzed is identical to that in this case. It provides:

            (a) A transfer made or obligation incurred by

                                           8
fraudulent intent on the part of the “debtor,” which in this case

is IERC.   The district court made a finding, which the Defendants

do not contest, that IERC was part of a Ponzi scheme at the time

this transfer was made.              In this circuit, proving that IERC

operated as a Ponzi scheme establishes the fraudulent intent behind

the   transfers   it   made.     Id.    at    558.     Therefore,    under   our

precedent, the district court did not err in holding that the

transfer was fraudulent under          § 24.005(a)(1).

      Additionally,      the   record       demonstrates    that   the   $60,000

transfer from     IERC    to   the    Defendants     was   fraudulent    under §

24.005(a)(2).     The district court found that IERC was insolvent on

April 9, 1999 when it made the transfer and that M&M gave no

reasonably equivalent value to IERC in return for the $60,000.

Based on these two findings, the transfer qualifies as fraudulent

under § 24.005(a)(2).      The Defendants do not challenge the finding

of insolvency, but they do contest the district court’s conclusion

that no value was given to IERC in exchange for the payment.6

           a debtor is fraudulent as to a creditor,
           whether the creditor’s claim arose before or
           after the transfer was made or the obligation
           was incurred, if the debtor made the transfer
           or incurred the obligation: (1) With actual
           intent to hinder, delay, or defraud any
           creditor of the debtor.

WASH. REV. CODE § 19.40.041(a)(1).
      6
       This court reviews de novo “the issue whether a debtor
received reasonably equivalent value.”      Matter of Fairchild
Aircraft Corp., 6 F.3d 1119, 1125 (5th Cir. 1993).

                                        9
      The Defendants argue that IERC received value in exchange for

its $60,000 transfer to M&M because the Defendants made a payment

of the same amount to Cook’s lawyers for legal fees.                “The primary

consideration in analyzing the exchange of value for any transfer

is the degree to which the transferor’s net worth is preserved.”

Byron, 437 F.3d at 560 (citing Butler Aviation Int’l v. Whyte, 6
F.3d 1119, 1127 (5th Cir. 1993)).            According to the commentary to

the Uniform Fraudulent Transfer Act (“UFTA”), “value is to be

determined in light of the act’s purpose, in order to protect the

creditors.”    In re Agric. Res. & Tech. Group, Inc., 916 F.2d 528,

540 (9th Cir. 1990).        “Consideration having no utility from a

creditor’s viewpoint does not satisfy the statutory definition.”

UNIF. FRAUDULENT TRANSFER ACT § 3 cmt. 2. (1984).             Here, IERC’s net

worth   was   diminished   by   the    $60,000     payment    to    M&M   and   its

defrauded creditors received no benefit from funding the legal

defense of one of the major organizers of this fraudulent scheme.

The district court was therefore correct in concluding that IERC

did   not   receive   reasonably      equivalent    value     for   its   $60,000

transfer to M&M.      See In re Whaley, 229 B.R. 767, 775 (Bankr. Minn.

1999) (“A payment made solely for the benefit of a third party,

such as a payment to satisfy a third party’s debt, does not furnish

reasonably-equivalent      value      to    the   debtor.”)    (citing     In    re

Bargfrede, 117 F.3d 1078, 1080 (8th Cir. 1997)).

      The record therefore supports the finding that the $60,000

transfer from IERC to M&M was fraudulent under both §§ 24.005(a)(1)

                                       10
and 24.005(a)(2). Because the transfer was fraudulent under both

sections, the district court correctly rejected the Defendants’

good faith defense.      As we explained in Byron, a defendant may

prevent recovery of the transferred assets by proving that the

transfers    were   received   in   good   faith   and   in   exchange   for

reasonably equivalent value.        Byron, 436 F.3d at 558.       The good

faith defense fails here because the Defendants cannot show that

they exchanged reasonably equivalent value for the $60,000 wire

transfer.7

                                     B.

     We now turn to address whether the district court erred in

holding Martella, the sole director and sole shareholder of M&M,

jointly and severally liable for the fraudulent conduct of M&M.

The Defendants argue that the district court’s finding that M&M was

the alter ego of Martella for the purposes of the $60,000 transfer

was erroneous -- and therefore that the court had no basis to hold

Martella jointly and severally liable.        Under Texas law, “[a]lter

ego applies when there is such unity between corporation and

individual that the separateness of the corporation has ceased and

holding only the corporation liable would result in injustice.”

Castleberry v. Branscum, 721 S.W.2d 270, 272 (Tex. 1986) (citing

     7
       Defendants also argue that the district court erred in
holding that IERC’s wire transfer to M&M constituted unjust
enrichment. Because we find that the wire transfer was fraudulent
under § 24.005, we need not reach the question of whether M&M was
unjustly enriched.

                                     11
First Nat. Bank in Canyon v. Gamble, 134 Tex. 112 (1939)).                 Alter

ego

            is shown from the total dealings of the
            corporation and the individual, including the
            degree to which corporate formalities have
            been followed and corporate and individual
            property have been kept separately, the amount
            of financial interest, ownership and control
            the individual maintains over the corporation,
            and whether the corporation has been used for
            personal purposes.

Id.     The Defendants correctly point out that the district court

made no findings with respect to these factors.

       Alter ego is not however, the only basis for piercing the

corporate veil, although many cases “have blurred the distinction

between    alter   ego   and   the   other   bases   for     disregarding    the

corporate fiction and treated alter ego as a synonym for the entire

doctrine of disregarding the corporate fiction.”               Id.    There are

“three broad theories of corporate disregard” under Texas law.

Fidelity & Deposit Co. of Maryland v. Com. Casualty Consultants,

Inc., 976 F.2d 272, 274 (5th Cir. 1992).             “The corporate veil is

pierced when:      (1) the corporation is the alter ego of its owners

or    shareholders;   (2)   the   corporation   is    used    for    an   illegal

purpose, and (3) the corporation is used as a sham to perpetrate a

fraud.”    Id. at 274-75 (citations omitted).         Although the district

court relied solely on its unsupported finding that M&M was the

alter ego of Martella to justify the piercing of the corporate

veil, “[w]e will not reverse a judgment if the district court can

be affirmed on any ground, regardless of whether the district court

                                      12
articulated the ground.”       Harris v. United States, 35 Fed. Appx.

390 at *1 (5th Cir. 2002) (unpublished) (citing United Indus., Inc.

v. Simon-Hartley, Ltd., 91 F.3d 762, 765 n.6 (5th Cir. 1996)).

     The district court made explicit factual findings that “[w]ith

regard to transferring $60,000 to Mr. Cook’s attorneys on March 31,

1999 and April 8, 1999, and receiving $60,000 from IERC on April 9,

1999,   defendant   Martella   utilized   his   control   over    defendant

corporation M&M for an illegal purpose (violation of the Court’s

orders) and to perpetuate a fraud (the Dennel Trading Program).”

We review the district court’s factual findings for clear error,

FED R. CIV. P. 52(a), and will not overturn them unless we are left

with “the definite and firm conviction that a mistake has been

committed.”    Anderson v. City of Bessemer City, N.C., 470 U.S.
564, 573 (1985) (internal quotation marks and citation omitted).

     We conclude that there is ample evidence to support the

district court’s finding that Martella used M&M for an illegal

purpose, and on this basis we can uphold the court’s conclusion

that the corporate veil may be pierced in this case.               Martella

testified at trial that he was aware of the SEC lawsuit against

Cook and of the order freezing Cook’s assets, and that he was

concerned about the impact of this lawsuit on M&M’s investment in

the Dennel Trading Program, which was determined to be a Ponzi

scheme.    He further testified that he was aware that Cook was

trying to work with his attorneys to unfreeze the assets, but that

Cook was   unable   to   pay   the   retainer   his   attorneys   required.

                                     13
Martella admitted to having a conversation with Cook in which Cook

asked him to advance the funds to the attorneys in exchange for

immediate reimbursement. He confirmed that he personally delivered

two checks to Cook’s lawyers, totaling $60,000, and that he gave

Cook an account number to effectuate the wire transfer.                       Martella

also confirmed that there were insufficient funds in M&M’s bank

account to cover the $60,000 at the time that the wire transfer

payment was received.        Based on these facts, the district court’s

finding   that    Martella       used   M&M    to   help    Cook       circumvent   the

Receivership Order and to perpetuate the Ponzi scheme after the

Dennel Trading Program was shut down was not clearly erroneous. We

therefore conclude that the district court did not err in finding

that M&M was used for an illegal purpose and we uphold the piercing

of the corporate veil solely on that basis.

                                         C.

     Finally,      the    Defendants     challenge         the    district     court’s

determination      that    the     judgment     may   not        be    discharged   in

bankruptcy.      The Defendants argue that this issue is not yet ripe

for adjudication as they have not filed for bankruptcy, nor sought

to have the judgment set aside in bankruptcy.                         Warfield concurs

that this determination was premature, and we agree.

                                        III.

     For the foregoing reasons, we AFFIRM the judgment as to

Martella and M&M, VACATE the judgment as to nondischargeability and

                                         14
REMAND for such further proceedings as the district court may deem

necessary.8

                 AFFIRMED in part, VACATED in part, and REMANDED.

     8
         The Defendants also appeal a Garnishment Judgment entered
by the district court on November 4, 2005. Because the Defendants’
only challenge to the garnishment is that the underlying judgment
is invalid, our affirmance of the district court on the Defendants’
liability for the fraudulent conveyance leads us to hereby AFFIRM
the garnishment judgment as well.

                                15