Burton W. Wiand, Partners, L.P. v. Lee
| Decision Date | 02 June 2014 |
| Docket Number | No. 13–10448.,13–10448. |
| Citation | 753 F.3d 1194 |
| Parties | Burton W. WIAND, as Receiver for Valhalla Investment Partners, L.P.; Viking Fund, LLC; Viking IRA Fund, LLC; Victory Fund, Ltd.; Victory IRA Fund, Ltd.; Scoop Real Estate, L.P.; and Traders Investment Club, Plaintiff–Appellee/Cross–Appellant, v. Vernon M. LEE, individually and as Trustee of the Vernon M. Lee Trust, Defendant–Appellant/Cross–Appellee. |
| Court | U.S. Court of Appeals — Eleventh Circuit |
OPINION TEXT STARTS HERE
Gianluca Morello, Michael Schaenen Lamont, Jared J. Perez, Wiand Guerra King, PL, Tampa, FL, for Plaintiff–Appellee/Cross–Appellant.
John R. Hightower, Jr., Lorien Smith Johnson, McIntyre Panzarella Thanasides Bringgold & Todd, PL, Tampa, FL, Richard J. McIntyre, Paul B. Thanasides, Mcintyre Panzarella Thanasides Bringgold & Todd, PL, Temple Terrace, FL, for Defendant–Appellant–Cross Appellee.
Appeals from the United States District Court for the Middle District of Florida.
Before MARTIN and ANDERSON, Circuit Judges, and FULLER,* District Judge.
Vernon M. Lee (“Lee”) individually and as Trustee of the Vernon M. Lee Trust (“the Lee Trust”) (collectively, “the Lee Defendants”) appeals the grant of summary judgment in favor of Burton M. Wiand (“the Receiver”) on the Receiver's complaint brought pursuant to the Florida Uniform Fraudulent Transfer Act (“FUFTA”), Fla. Stat. § 726.101 et seq. The Receiver sought to void distributions of profits to the Lee Defendants from the receivership entities, which were used in perpetration of a Ponzi scheme.1 The Receiver appeals the denial of prejudgment interest on the profits Lee was ordered to return to the receivership entities.
After careful review and with the benefit of oral argument, we affirm the district court's grant of summary judgment in favor of the Receiver and reverse and remand the denial of prejudgment interest.
This case is one of many “clawback” actions initiated by the Receiver to recover profits from investors in a Ponzi scheme run by Arthur Nadel (“Nadel”) in order to compensate those investors who were not lucky enough to have profited on their investments. The Receiver brings this action on behalf of Valhalla Investment Partners, L.P. (“Valhalla Investment”), Viking Fund, LLC (“Viking Fund”), Viking IRA Fund, LLC (“Viking IRA Fund”), Victory Fund, LTD (“Victory Fund”), Victory IRA Fund, LTD (“Victory IRA Fund”), and Scoop Real Estate, L.P. (“Scoop Real Estate”) (collectively, “the Hedge Funds”), as well as Traders Investment Club (“Traders”).
Nadel was a hedge fund manager who induced investors to open trading accounts with the Hedge Funds based on false representations as to the funds' assets and the returns the investors would receive. Although Nadel conducted some trading activity, Nadel primarily used the principal funds of new and existing investors to benefit himself and to pay distributions to older investors in order to maintain the appearance that the Hedge Funds were generating profits through legitimate investment activities, thus enabling him to attract new investors. The scheme eventually collapsed in January 2009, and Nadel subsequently plead guilty to a fifteen-count indictment charging him with securities fraud, mail fraud, and wire fraud. On December 3, 2010, Nadel was sentenced to a 168–month sentence and ordered to pay $174,930,311.07 in restitution. Nadel died in custody on April 16, 2012.
The details of the manner in which Nadel perpetrated the Ponzi scheme are not in dispute. Nadel ultimately controlled the Hedge Funds' investments through two entities that he created and controlled, Scoop Capital and Scoop Management. Nadel created and controlled Traders, an investment club separate from the Hedge Funds. From at least December 1999 through January 2009, Nadel managed the Hedge Funds and misrepresented their performance. During this time period, Nadel maintained more than 700 investor accounts and raised at least $336 million from investors. Nadel misrepresented the net asset value and net profits of the Hedge Funds and Traders through monthly statements issued to investors. The monthly statements showed appreciation and increase in the investor accounts that did not exist. Nadel used his control of the Hedge Funds' trading activity to transfer investor funds to brokerage accounts for the Hedge Funds as well as to Nadel's personal accounts. Investors' funds from the Hedge Funds and Traders were commingled among Nadel's personal accounts and then combined into a single master trading account that was used to purchase securities. Nadel then allocated completed trades to the Hedge Fund brokerage accounts and his personal accounts, typically allocating profitable trades to non-Hedge Fund accounts and unprofitable trades to the Hedge Fund accounts. Investors' funds were used to pay management fees and performance-incentive fees to Nadel based on the inflated performance and net asset value of the funds reported to the investors.
Although Nadel represented to investors that their individual accounts and the Hedge Funds as a whole were generating profits, the Hedge Funds were insolvent as early as 2000 and remained so until January 2009, when the scheme collapsed. The Hedge Funds were funded almost entirely from investors and required continuous infusions from investors to pay redemptions to earlier investors. Nadel managed the Traders investment club in a similar manner. Nadel misrepresented the gains generated by Traders and used principal investor funds, as well as cash transferred from Hedge Fund accounts, to pay Traders' investors' redemptions. The Hedge Funds collapsed in January 2009 as a result of the funds' losses and the payment of larger management fees to Nadel based on the fabricated increasing gains of the funds.
Lee and the Lee Trust held accounts with all of the Hedge Funds and with Traders. The Lee Defendants received distributions from the Hedge Funds and Traders from late 2000 through 2008. The distributions received by the Lee Defendants during this period were $935,631.51 more than their investments. 2
The Receiver filed a complaint on January 19, 2010, seeking the return of these “false profits” on behalf of the receivership entities in order to partially compensate those investors who suffered a net loss on their investments. The Receiver sought to void the distributions from the receivership entities to the Lee Defendants as fraudulent transfers under FUFTA. On March 23, 2012, the Receiver moved for partial summary judgment on the issue of whether Nadel operated the Hedge Funds as a Ponzi scheme from 1999 to January 2009 and whether, consequently, every transfer of an asset from a Hedge Fund during that time was made with actual intent to hinder, delay, or defraud creditors of Nadel under FUFTA's actual fraud provision. SeeFla. Stat. § 726.105(1)(a). The Receiver filed another motion for summary judgment on liability against Lee under FUFTA and on its unjust enrichment claim and also sought judgment as to damages in the amount of $935,631.51, plus prejudgment interest.
The magistrate judge issued a thorough report and recommendation that recommended granting summary judgment in favor of the Receiver and against the Lee Defendants but also recommended denial of an award of prejudgment interest to the Receiver. The magistrate judge found that Nadel operated the Hedge Funds and Traders as a Ponzi scheme during the time these entities made their distributions to the Lee Defendants, and that these distributions were therefore avoidable under FUFTA because they were made with the actual intent to defraud creditors. The magistrate judge recommended against an award of prejudgment interest on the grounds that the Lee Defendants assumed the legitimacy of the investment funds and that it would be inequitable to require them to pay more than the amount of their false profits to the receivership entities. The district court adopted the magistrate judge's report and recommendation and entered final judgment in favor of the Receiver and against the Lee Defendants in the amount of $935,631.51.
This case requires us to state whether the elements of FUFTA's actual fraud provision are satisfied in a receivership proceeding where the creditors are the receivership entities and the debtor is a person who controlled and transferred the entities' funds in furtherance of a Ponzi scheme. The Receiver's amended complaint asserts violations of FUFTA under both its actual fraud provision, seeFla. Stat. § 726.105(1)(a), and its constructive fraud provision, seeFla. Stat. § 726.105(1)(b). Since the magistrate judge concluded that Nadel's transfer of funds from the receivership entities to the Lee Defendants violated FUFTA's actual fraud provision, he did not reach the issue of whether the transfers also violated the constructive fraud provision. The issue presented by this appeal is whether Nadel's transfer of receivership funds to the Lee Defendants was a transfer of “property of a debtor” as required by FUFTA and otherwise satisfies the elements of actual fraudulent intent. SeeFla. Stat. § 726.101(2) ().
Under FUFTA's actual fraud provision, a “transfer made or obligation incurred by 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: (a) [w]ith actual intent to hinder, delay, or defraud any creditor of the debtor....” Fla. Stat. § 726.105(1)(a). The statute requires “[1] a creditor to be defrauded, [2] a debtor intending fraud, [3] and a conveyance of property which is applicable by law to the payment of the debt due.” Johnson v. Dowell, 592 So.2d 1194, 1196 (Fla. 2d DCA 1992). A “creditor” is “a person who has a claim,” and “claim” is broadly defined as “a right to payment, whether or not the right is reduced to judgment, liquidated,...
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