Johnson v. Studholme, Civ. A. No. 85-M-794.
| Decision Date | 15 October 1985 |
| Docket Number | Civ. A. No. 85-M-794. |
| Parties | James P. JOHNSON, as Equity Receiver to Collect Assets, on behalf of the Claimants of Chilcott Commodities Corporation, Chilcott Portfolio Management, Inc., Thomas D. Chilcott, d/b/a Chilcott Futures Fund, Thomas D. Chilcott, and Chilcott Futures Fund, Plaintiff, v. Joseph STUDHOLME and Renabelle B. Studholme, Defendants. |
| Court | U.S. District Court — District of Colorado |
Gerald L. Bader, Jr., Pamela Nagle Hultin, Ann L. Duckett, Bader & Cox, Denver, Colo., for plaintiff.
John A. Studholme, Fred Clifford, Boulder, Colo., for defendants.
In Civil Action No. 81-F-999, an action brought by the Commodity Futures Trading Commission, James Johnson was appointed Equity Receiver for Chilcott Commodities Corporation, Chilcott Portfolio Management, Inc., Thomas D. Chilcott, d/b/a Chilcott Futures Fund, and Thomas D. Chilcott, to take control of all of the properties and interests and exercise all the rights and powers of those defendants in that case. The reasons for that action have been explained fully in other opinions by other judges in this district. See the orders in CFTC v. Chilcott Commodities Corp., et al., No. 81-F-999 (D.Colo. August 30, 1982) (Finesilver, J.) aff'd in part and rev'd in part, 713 F.2d 1477 (10th Cir. 1983); Johnson v. Chilcott, 590 F.Supp. 204 (D.Colo.1984) (Carrigan, J.); Johnson v. Chilcott, 599 F.Supp. 224 (D.Colo.1984) (Carrigan, J.); Niagra Fire Insurance v. Johnson, No. 84-A-746 (D.Colo. August 2, 1984) (Arraj. J.); Johnson v. Miller, 596 F.Supp. 768 (D.Colo.1984) (Kane, J.). In summary, Thomas Chilcott, president of Chilcott Portfolio Management, Inc., operated a classic "Ponzi" scheme and obtained millions of dollars from hundreds of investors by representing that their money would be pooled in a highly profitable investment fund. He induced a constant stream of new investments by misrepresenting the Fund's performance and gave the appearance of success by using the funds from new investments to pay fictitious profits to earlier investors. When the scheme lost momentum, most investors lost their money. The operations ended in June, 1981.
The receiver brought this and other actions against all those investors who received payments from Chilcott. He seeks to recover as "fictitious profits" (the amounts paid to the investors in excess of their contributions) for distribution to the receivership estate's creditors and claimants. The receiver does not purport to assert any claims on behalf of defrauded investors. Recovery is sought under claims for relief based on theories of (1) recovery of receivership assets, (2) unjust enrichment, (3) conversion, and (4) money had and received. Jurisdiction is ancillary to the main receivership action in this district. The defendants have moved to dismiss these claims under F.R.Civ.P. 12(b)(6).
In considering this motion, the court must assume that the plaintiff can prove all of the facts alleged in the complaint. What is most significant, however, is what the plaintiff has not alleged. There is no allegation that any defendant committed fraud or participated in the scheme. Indeed, there is no allegation that any of the defendants knew that the Fund was a Ponzi scheme, and no allegation that the defendants received these payments with anything less than a good faith belief that it was a legitimate return on their investment as part of a contractual relationship with the Fund.1 In short, the defendants simply received payments which appeared to be the very performance which was promised to them when they made their investments in the Fund. The basic premise of the plaintiff's claims is that fairness requires a redistribution of the effects of Thomas Chilcott's fraud by collecting from those who received more than their investments and paying those who participate in the receivership estate. It should be emphasized that the receiver is not asserting the rights or claims of any investors, and that distribution is not to be made to a class of investors. What may be collected from these early investor defendants would become a part of the general receivership estate.
The cases upon which the receiver places principal reliance are not applicable because they are dependent upon substantive provisions of the bankruptcy code. The Utah bankruptcy court applied the recovery from voidable transfer provisions of 11 U.S.C. § 550, and the avoidance of transfers within one year before bankruptcy provision of 11 U.S.C. § 548(b) to recover Ponzi scheme payments in In re Independent Clearing House Co., 41 B.R. 985 (D.Utah Bkrtcy 1984). The recovery was, of course, limited to the payments made in the one year period before the filing of the bankruptcy petition.
The decision rests solely upon the application of federal bankruptcy law and does not purport to create any equitable right of action. The plaintiff argues that an equity receiver has the powers of a bankruptcy trustee. That adage has some utility, but it does not mean that the substantive provisions of the bankruptcy code are available for use in a non-bankruptcy receivership. The Bankruptcy Code is sui generis. Its specific provisions function within the context of an intricate legislative system of laws designed carefully to meet the policy objectives of the Congress. For example, § 548 of the Bankruptcy Code is a strict liability provision that permits a trustee to avoid transfers made for less than equivalent value within one year preceding the filing of bankruptcy. That power is exercised for the benefit of the creditors of the bankruptcy estate whose claims are filed and allowed according to other statutory requirements. To extract this authority from the Bankruptcy Act, and apply it to recover payments made from three to twelve years earlier for the benefit of any persons to whom distribution may ultimately be ordered in the receivership, would be such an expansion of the law as to be judicial legislation beyond the authority of this court.
The plaintiffs' contention that the defendants were not purchasers for value is both irrelevant and wrong. It is irrelevant to the extent it purports to extend bankruptcy law to this situation. The point is wrong because the value given by the investors was, of course, their contributions and the risk that they may lose all or part of their investment. In retrospect it is obvious that both the risks and the possible returns were high. While the scheme may have been illegal, from an economic perspective there is no doubt that the innocent investors gave value. They did all that was asked of them in the representations which induced their investment.
In In re Young, 294 Fed. 1, (4th Cir. 1923), an investor put $4,000 into a Ponzi scheme. Before the debtor declared bankruptcy the investor received $4,796.90. After bankruptcy the investor filed a claim with the court to recover another $2,000 against the bankrupt estate as part of the contractual obligation owed by the debtor. He asserted it was his right to share equally in the distribution of the estate along with other victims who may have received back only a part or none of their investment. The court rejected his claim, holding that under equitable principles the investor who had already received "profits" would not be allowed to share in the distribution of the bankruptcy estate where after its division other investors could only recover a small part of their capital investment. In re Young did not allow a receiver for a Ponzi scheme to recover fictitious profits.
In re Tedlock Cattle Co., Inc., 552 F.2d 1351 (9th Cir.1977), did no more than follow Young and apply this "equity" theory as a measure for recovery by defrauded "Ponzi" scheme investors. The dispute in Te...
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