Hays v. Adam
| Citation | 512 F.Supp.2d 1330 |
| Decision Date | 15 March 2007 |
| Docket Number | No. Civ.A. 1:05-CV-2705C.,Civ.A. 1:05-CV-2705C. |
| Parties | S. Gregory HAYS, receiver for Mobile Billboards of America, Inc., et al., Plaintiff, v. David E. ADAM, et al., Defendants. |
| Court | U.S. District Court — Northern District of Georgia |
James David Dantzler, Jr., Merle R. Arnold, III, Troutman Sanders, LLP, Atlanta, GA, for. Plaintiff.
William Gordon Leonard, Leonard & Swenson, LLP, Gregory Bartko, Law Office of Gregory Bartko, James Albert Nofi, Page Perry LLC, Atlanta, GA, John A. Beam, III, Beam, Miller & Rogers, PLLC, Nashville, TN, Jonathan Schwartz, Law Office of Jonathan Schwartz, Marina Del Rey, CA, for Defendants.
Matt Bondurant, Reidsville, NC, pro se.
Bruce F. Ruark, pro se.
Craig Warner, Fenton, MI, pro se.
Jay Castro, Palm Desert, CA, pro se.
This action comes before the court on several motions that are ripe for consideration. This order addresses the following motions:
1. Motion to dismiss count II of the complaint [Doc. No. 248] by defendants Alternative Financial Concepts, LLC; Arthur Anderson; Arthur Anderson Retirement Planning, Inc.; Timothy L. Bradshaw; CLR Group, Inc.; Daniel S. Dark; Freedom Capital, LLC; James K. Gibson, Jr.; Keith Gibson; Victor Graham; Gibson & Associates, Inc.; Michael L. Lawson; Levonda Leamon; Legacy Estate Concepts, Inc.; Clarence J. Lyon, II; Rebecca Plummer; Elisabeth Rainey; James Rainey; Hugh Thacker; Craig Warner; and Gary P. Walker; all represented by Gary Bartko (the "Bartko defendants").
2. Motion to compel discovery [Doc. No. 252] by defendants David Womack, Daryl Bornstein, Janalyn Bornstein, Craige DeMoss, and Jerry Poss, all represented by John Beam (the "Beam defendants").
3 Motion to join the motion to dismiss count II of plaintiff's complaint, or, in the alternative, motion for summary judgment [Doc. No. 262] by the Beam defendants.
4. Motion for partial summary judgment as to liability [Doc. No. 275] by the Receiver.
5. Second motion to dismiss count II of the complaint [Doc. No. 301] by the Bartko defendants.
From 2001 through 2004, Mobile Billboards of America, Inc. ("MBA") used a network of sales agents to sell more than $60 million in mobile billboard investments to investors as part of what was ultimately discovered to be massive Ponzi scheme.1 The scheme worked as follows: Purchasers paid MBA $10,000 to $20,000 apiece to purchase mobile billboard frames that were to be mounted on the sides of large trucks. Simultaneously with the purchase of the billboard, and even though their purchase agreements technically provided them with several options as to what to do with the billboards, all of the purchasers leased the billboards back to Outdoor Media Industries ("Outdoor Media") for a seven-year term. Outdoor Media was a shell company affiliated with MBA and owned and operated by MBA's principals. Investors were told that Outdoor Media would arrange for placement of the billboard on a truck for advertising and make monthly lease payments to the investor, resulting in a fixed return of approximately 13.49% per year.
As part of the purchase, MBA agreed to repurchase the billboard after the lease term for the full purchase price. Investors were promised that MBA had established a trust, the Reserve Guarantee Trust ("RGT") to assure that money would be available to fund the repurchase obligation, and that a portion of the purchase price paid by investors would be deposited into RGT for this purpose. In consideration for the portion of their purchase price made to RGT, investors were issued a "Trust Secured Certificate" that entitled them to "an undivided beneficial interest in the assets of RGT with a liquidation amount of up to [$20,000 times the number of billboards] purchased." RGT was also affiliated with MBA and was controlled by MBA's officers.
In actuality, Outdoor Media's mobile billboard business did not generate sufficient revenues to make the monthly lease payments to the investors. In fact, the billboards could not have generated profits because very few, if any, of the billboards actually existed. Instead, MBA transferred money paid by recent investors to Outdoor Media to fund the lease payments to earlier investors. Also, funds supposedly deposited into RGT were used for other purposes and would likely have been unavailable to investors for repurchase of the billboards.
The sales agents — the defendants in this case — received commissions and bonuses for their participation in the mobile billboard scheme. The agents were members of organizations assembled by "master sales agents," but operated under contracts with MBA. MBA typically paid a 27% commission per billboard sale to one of the master sales agents, who in turn made a commission payment to the individual within his or her organization that actually made the sale.
The Receiver claims that the billboard investments sold by the sales agents were unregistered securities. The agents sold the alleged unregistered securities and received upwards of $10 million in commissions and bonuses from the sales even though they were not registered securities dealers. The Ponzi scheme was dependent upon the sales agents' efforts in soliciting investors. The Receiver does not allege any malfeasance on the part of the agents.
In September 2004, the Securities and Exchange Commission ("SEC") filed an enforcement action, Civil No. 1:04-CV-2763-WBH, in this court against MBA and affiliated entities and individuals. Plaintiff S. Gregory Hays (the "Receiver") was appointed the receiver for MBA and its affiliated businesses. The Receiver filed this action on October 18, 2005 [Doc. No. 1], seeking an accounting and recovery of the commissions and bonuses paid to the defendant sales agents pursuant to the investment scheme. Although the original complaint contained allegations of fraudulent conveyance, the Receiver later dropped this count [Doc. No. 298] and stipulated that its lawsuit was limited to the allegation that the defendant sales agents sold unregistered securities and did not allege any other "bad acts" on behalf of the defendants [Doc. No. 280].
The Bartko defendants' motion to dismiss [Doc. No. 248] argues that the Receiver's unjust enrichment claim is precluded by Georgia law due to an existence of a contract between the parties. Although styled as a motion to dismiss, the motion relies almost exclusively on matters outside the pleadings. Accordingly, the court will construe the motion as a motion for summary judgment. See Fed.R.Civ.P. 12(b); Property Management & Investments v. Lewis, 752 F.2d 599, 605 (11th Cir.1985) (). The Beam defendants' motion to join the motion to dismiss, or, in the alternative, motion for summary judgment [Doc. No. 262] will be treated as a motion for summary judgment for the same reasons. Because the issues discussed in these motions have also fully been briefed in connection with the Receiver's motion for partial summary judgment as to liability [Doc. No. 275], the court will address the parties' cross-motions for summary judgment in the discussion of the Receiver's motion below.
Before moving to compel discovery, the federal and local rules of procedure require the moving party to confer in good faith with the other party to resolve the issue and to certify to the court that he or she has done so. Fed.R.Civ.P. 37(a)(2)(A)(B); L.R. 37.1. It appears from the record that the Receiver's counsel made numerous attempts to communicate with Beam regarding discovery issues, only to receive no response. The only evidence that the Beam defendants attempted to resolve the issue is a single letter from Beam to the Receiver's counsel dated July 18, 2006. This single letter does not constitute a sufficient effort to resolve the issue outside of court pursuant to Rule 37(a) and Local Rule 37.1. See Garner v. Academy Collection Service, No. 3:04-CV-93-JTC, 2005 U.S. Dist. LEXIS 43265, at *4 (). The Beam defendants' motion to compel [Doc. No. 252] is therefore DENIED.2
Despite the complex nature of this case in terms of the number of defendants, pending related cases, and extensive briefing by the parties, the Receiver's theory of liability is straightforward. The Receiver argues that because the mobile billboard investment sold by the defendants was an unregistered security, its sale violated federal securities laws. Thus, the Receiver reasons, regardless of the knowledge or intent of the defendants, the monies paid to them as commissions by MBA for selling the unregistered securities constituted unjust enrichment and should now be returned to the Receiver to be distributed to creditors and investors. The defendants, however, argue that the transactions at issue constituted "business opportunities," not securities, and were properly registered as such with the Federal Trade Commission (FTC).
The court's analysis on the parties cross-motions for summary judgment accordingly involves, at most, two steps. First, the court must determine whether the underlying investments constituted securities under federal securities laws. If so, then the court must determine if, as a matter of law, the Receiver is entitled to recovery based on their claim for unjust enrichment. If the Receiver meets his burden at both stages, a grant of summary judgment to the Receiver is proper.
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