Commodity Futures Trading Comm'n v. Rust Rare Coin, Inc.
| Decision Date | 20 August 2020 |
| Docket Number | Case No. 2:18-cv-00892 |
| Parties | COMMODITY FUTURES TRADING COMMISSION, and STATE OF UTAH DIVISION OF SECURITIES, through Attorney General Sean D. Reyes, Plaintiffs, v. RUST RARE COIN, INC., a Utah corporation, GAYLEN DEAN RUST, an individual, DENISE GUNDERSON RUST, an individual, and JOSHUA DANIEL RUST, an individual, Defendants; and ALEESHA RUST FRANKLIN, an individual, R LEGACY RACING INC., a Utah corporation, R LEGACY ENTERTAINMENT LLC, a Utah limited liability company, and R LEGACY INVESTSMENTS LLC, a Utah limited liability company, Relief Defendants. |
| Court | U.S. District Court — District of Utah |
ORDER AND MEMORANDUM DECISION OVERRULING OBJECTIONS AND GRANTING RECEIVER'S MOTION TO APPROVE DISTRIBUTION PLAN
In November 2018, the Commodity Futures Trading Commission (CFTC) and the State of Utah brought this action against Defendants Rust Rare Coin, Inc., Gaylen Dean Rust, Denise Gunderson Rust, and Joshua Daniel Rust (collectively, "Rust Rare Coin"), accusing them of operating a major Ponzi scheme. (ECF No. 1.) Through a series of preliminary injunctions, the court froze all of the assets of Rust Rare Coin. (See ECF Nos. 22, 53, 54, 59, 69, 77.) The court also appointed Jonathan Hafen as Receiver for the Rust Rare Coin estate and instructed him to liquidate its assets. (ECF No. 54.)
The Receiver has now filed a motion to approve his proposed distribution plan to compensate the victims of the Rust Rare Coin fraud. (ECF No. 298.) The court has received fourteen objections to this proposal. (ECF No. 325). Having reviewed each objection and having considered the arguments made by the objectors at three separate hearings held on August 17 and 18, the court now overrules the objections and grants the Receiver's motion.
S.E.C. v. Byers, 637 F. Supp. 2d 166, 174 (S.D.N.Y. 2009) (internal quotation omitted) (collecting cases); S.E.C. v. Vescor Capital Corp., 599 F.3d 1189, 1194 (10th Cir. 2010) () (internal quotations omitted).
In crafting a distribution plan, courts frequently favor a pro rata distribution of funds and disfavor attempts to trace losses to individual investors. See S.E.C. v. Quan, 870 F.3d 754, 762 (8th Cir. 2017) () (collecting cases); S.E.C. v. Credit Bancorp, Ltd., 290 F.3d 80, 88 (2d Cir. 2002) (). The type of pro rata distribution method that is "most commonly used (and judicially approved) for apportioningreceivership assets" is known as the "rising tide" method. S.E.C. v. Huber, 702 F.3d 903, 906 (10th Cir. 2012).
The Receiver's plan is made up of two key components: the use of a class system to categorize and rank the types of claims received and a distribution method based on the rising tide principles.
First, the Receiver proposes dividing the potential claims into six distinct classes, with claims in lower classes receiving no distributions until the claims in higher classes have been fully satisfied.1 The six classes are:
1. Administrative costs of the Receiver and the Rust Rare Coin estate;
2. Tax liabilities;
3. Secured creditors (to be paid out of the proceeds of their collateral);
4. Unsecured creditors and defrauded investors;
5. Non-recognized trade creditor claims; and
6. Insider or subordinated claims.
As a practical matter, the Receiver believes the first, second, and third classes will be paid in full, the fourth class will be paid in part, and the fifth and sixth classes will receive no payments.
Second, the Receiver proposes distributing assets using the rising tide method. This is essentially a pro rata distribution that takes into consideration not only how much a person invested with Rust Rare Coin, but also what percentage of their investment was returned to them before the Receiver was appointed.
The Receiver uses the following hypothetical to explain the calculations:
(Mot. at 7 (ECF No. 298).) Using this method, the Receiver estimates that about 75% of claimants would receive at least some type of distribution.
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The Receiver's proposed Class Four combines claims from unsecured creditors and defrauded investors. Unsecured creditors include, for example, individuals who sold items to Rust Rare Coin but never received payments; employees of Rust Rare Coin who never received their last paychecks or other benefits; and vendors who provided services to Rust Rare Coin but were never paid. Meanwhile, the defrauded investors category includes all those who invested in the Rust Rare Coin silver pool.
Daxson Hale (who objects on behalf of himself as well as Jared Clark Gay and J. Scott Rakozy) (see ECF No. 325-7) and Sara McCormick (see ECF No. 325-6) are unsecured creditors who argue that their claims should be placed in a class above the defrauded investors. They maintain that investments are inherently risky and that the investors should have known that there was a possibility that they would lose their investments. Employees and vendors, by contrast, simply entered normal, non-risky contracts with what appeared to be a typical business. Because of this difference in risk, the unsecured creditors contend that their claims should take priority over the investors' claims.
Alice Jones (who objects on behalf of herself and Jennifer Jones Clawson, Bryan Douglas Jones, Lindsay Erin Jones, and Courtney Jones Nielsen) (see ECF No. 325-8), Gloria Bowman (who objects on behalf of herself and Phyllis Bowman, David Bowman, Katherine Bowman, Sarah Bowman, Jeannette Dieman, and various affiliated trusts and LLCs) (see ECF No. 325-9), and Kathleen Barlow (see ECF No. 325-10) are all defrauded investors who argue that theirinvestments should receive priority above the claims of unsecured creditors.2 In response to the arguments above, these objectors point out that unsecured creditors do assume risks when they engage in business. If they did not want to take on such risks, they should have insisted on receiving some type of security interest to protect themselves, which would have allowed them to become secured creditors. The investors take the position that absent such security, these creditors should not get special treatment.
The investors also assert that it is standard for investor claims to take priority over the claims of unsecured creditors. For support, they cite two cases, C.F.T.C. v. Capitalstreet Fin., LLC, Case No. 3:09-cv-387-RJC-DCK, 2010 WL 2572349 (W.D.N.C. June 18, 2010), and S.E.C. v. HKW Trading, LLC, Case No. 8:050-cv-1076 T-24-TBM, 2009 WL 2499146 (M.D. Fla. Aug. 14, 2009). In both cases, the court approved distribution plans that prioritized defrauded investors above general creditors.
The court is not inclined to change the Receiver's plan based on these cases. Neither case includes any legal analysis or explanation regarding the relationship between investors and creditors. Instead, it appears that in each instance, the receivers in those cases proposed plans that prioritized investors over creditors, for unknown reasons, and the court accepted those plans because no one objected.3 Neither case explains what a court should do when a receiver proposes treating the two groups the same and both groups object to that proposal.
Ultimately, the court agrees with the Receiver's view that equity is best served by treating the unsecured creditors and defrauded investors as being part of the same class. On the one hand, it is true that the unsecured creditors were, in some sense, less blameworthy than the defrauded investors. They did not engage in risky behavior like the investors did.4 On the other hand, the only reason any funds are available to pay the unsecured creditors is because of the unlawful investments Rust Rare Coin obtained. If Rust Rare Coin had simply been a normal enterprise that had gone out of business, the unsecured creditors likely would have had no recovery at all. A recovery is possible here because this was a Ponzi scheme and the Receiver was empowered to claw back distributions made to earlier...
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