Klein v. Cornelius

• Decision Date: 27 May 2015
• Docket Number: No. 14–4024.,14–4024.
• Citation: 786 F.3d 1310
• Parties: R. Wayne KLEIN, the Court–Appointed Receiver of U.S. Ventures LC, Winsome Investment Trust, and the assets of Robert J. Andres and Robert L. Holloway, Plaintiff–Appellee, v. William R. CORNELIUS, and Cornelius & Salhab, Defendants–Appellants. U.S. Commodity Future Trading Commission, Amicus Curiae.
• Court: U.S. Court of Appeals — Tenth Circuit

786 F.3d 1310

R. Wayne KLEIN, the Court–Appointed Receiver of U.S. Ventures LC, Winsome Investment Trust, and the assets of Robert J. Andres and Robert L. Holloway, Plaintiff–Appellee

v. William R. CORNELIUS, and Cornelius & Salhab, Defendants–Appellants.U.S. Commodity Future Trading Commission, Amicus Curiae.

No. 14–4024.

United States Court of Appeals, Tenth Circuit.

May 27, 2015.

Berry Dunbar Bowen, Houston, TX, for Appellants.

David C. Castleberry (Christopher M. Glauser, with him on the brief), Manning Curtis Bradshaw & Bednar LLC, Salt Lake City, UT, for Appellee.

Before TYMKOVICH, HOLMES, and BACHARACH, Circuit Judges.

Opinion

TYMKOVICH, Circuit Judge.

This is an appeal from the district court's grant of summary judgment to the court-appointed receiver for Winsome Investment Trust, a business entity whose founder, Robert J. Andres, caused it to illegally distribute funds as part of a Ponzi scheme. The court found that Andres had fraudulently transferred funds from Winsome to William T. Cornelius and his law firm, Cornelius & Salhab, and that the receiver could recover these funds on Winsome's behalf under the Uniform Fraudulent Transfer Act (UFTA). Cornelius, who was unaware of the fraud, raises several challenges to the district court's jurisdiction and its judgment on the merits.

We affirm. The receiver was entitled to sue Cornelius in Utah, and no federal jurisdictional impediments prevent the district court from reaching the UFTA claim. The district court also correctly concluded the payments to Cornelius violated the UFTA and the four-year statute of limitations did not bar the receiver's claim.

I. Background

The Commodity Futures Trading Commission (CFTC) brought an action in Utah against Winsome and Andres, alleging that they operated a Ponzi scheme in violation of the Commodity Exchange Act (CEA). Winsome was a trading pool that would solicit investors with the promise of large profits. Although its investments ultimately collapsed, Winsome, under Andres's control, gave the appearance of solvency by paying early investors with funds acquired from later investors. Winsome also made some payments to vendors and suppliers of the business, as well as other entities.

Cornelius and his Houston-based law firm were among the recipients. Between September 2006 and July 2007, Winsome paid Cornelius & Salhab a total of $90,000 to represent one of Andres's friends in a criminal proceeding in New Hampshire. The friend was not otherwise connected to Winsome, and Cornelius did not provide any services to Winsome directly.

After the CFTC got wind of the Ponzi scheme, it filed suit in Utah federal court against Winsome and Andres, as well as Andres's co-conspirator and a Utah-based company that the co-conspirator controlled. The CFTC sought a receiver to take over Winsome's assets. The court appointed R. Wayne Klein, who became responsible for controlling Winsome's and Andres's operations and records, managing and preserving their assets, collecting money owed to them, suing when necessary to preserve or increase their assets or to recover improper payments, and protecting the interests of their investors.

Klein's investigation of Winsome's operations revealed a number of questionable payments that might be recoverable under the CEA or the state UFTA. These included legal fees paid to Cornelius for representing the New Hampshire defendant. Klein filed an action against Cornelius, and the district court granted summary judgment in Klein's favor.

We AFFIRM the district court. Pursuant to his appointment as receiver, Klein was entitled to void the payments to Cornelius as a fraudulent transfer and preserve them for victims of the Ponzi scheme.

II. Analysis

Cornelius claims the district court made a number of mistakes involving the Utah court's jurisdiction to hear claims against him and his firm, both based in Texas, and in concluding that the payments to the firm were recoverable under the UFTA. We first address the jurisdictional questions—subject matter jurisdiction, standing, and personal jurisdiction—and conclude that all were satisfied. We then discuss the UFTA, finding that the payments violated the Act and that Klein's claims were not otherwise barred by its four-year statute of limitations.

A. Jurisdictional Claims

Cornelius makes three jurisdictional challenges. First, he argues the CEA does not grant the district court subject matter jurisdiction to hear state fraudulent transfer claims against third-party recipients of Ponzi scheme funds. Next, he contends Klein lacked standing to assert the UFTA because Winsome was not a legal entity that could maintain its own fraudulent transfer claim. Finally, he claims the district court could not exercise personal jurisdiction over him because he lacked sufficient contacts with Utah.

1. Subject Matter Jurisdiction Under the CEA

Cornelius first argues that the CEA does not authorize a receiver to bring state fraudulent transfer claims in federal court against third-party recipients of Ponzi scheme funds.

We start with the CEA. Section 13a–1 authorizes the CFTC to bring civil actions in federal court to enjoin violations of the CEA or “to enforce compliance with this chapter, ... and said courts shall have jurisdiction to entertain such actions.” 7 U.S.C. § 13a–1(a). Among other things, the statute allows a court to prohibit by restraining order the transfer or disposal of assets and to appoint a temporary receiver to administer such an order or “perform such other duties as the court may consider appropriate.” Id; see also SEC v. Vescor Capital Corp., 599 F.3d 1189, 1194 (10th Cir.2010) (“[T]he district court has broad powers and wide discretion to determine relief in an equity receivership.” (quoting SEC v. Safety Fin. Serv., Inc., 674 F.2d 368, 372–73 (5th Cir.1982) ) (internal quotation marks omitted)). In addition to the CEA, federal law provides receivers a broad grant of authority to sue in federal court to enforce rights over receivership property. 28 U.S.C. § 754.

But the statutory scheme does not prevent a receiver from also pursuing state-law claims in federal court. In fact, the general grant of federal question jurisdiction under the CEA brings with it the power to hear “all other claims that are so related to” the original claim as to “form part of the same case or controversy.” 28 U.S.C. § 1367(a). Under this provision and 28 U.S.C. § 754, a receiver may bring ancillary state-law claims against entities alleged to have received unlawful payments. See Peacock v. Thomas, 516 U.S. 349, 356, 116 S.Ct. 862, 133 L.Ed.2d 817 (1996) (“[W]e have approved the exercise of ancillary jurisdiction over a broad range of supplementary proceedings involving third parties to assist in the protection and enforcement of federal judgments....”); Donell v. Kowell, 533 F.3d 762, 769 (9th Cir.2008) (holding that § 1367 allowed a receiver to bring a UFTA claim in federal court against a third party under ancillary jurisdiction where the primary lawsuit presented a federal question); Scholes v. Lehmann, 56 F.3d 750, 753 (7th Cir.1995) (holding that § 1367 allowed a receiver to bring a claim under a state fraudulent transfer act against third parties under ancillary jurisdiction where the primary lawsuit charged the violation of federal securities laws). A suit is ancillary to a receiver's appointment if it “seeks to accomplish the ends sought and directed by the suit in which the appointment was made.” Eberhard v. Marcu, 530 F.3d 122, 129 (2d Cir.2008) (quoting Tcherepnin v. Franz, 485 F.2d 1251, 1255–56 (7th Cir.1973) ).

Here, the district court enjoined Winsome from violating the CEA and tasked Klein with various responsibilities needed to enforce the injunction. The court not only ordered him to preserve or increase Winsome's assets, but also empowered him to sue in order to do so—a routine order well within the broad range of remedial functions allowed under § 13a–1. Moreover, it is clear that the state-law claim against Cornelius is ancillary to the court's injunction against Winsome's violation of a federal statute, as well as the court's appointment of Klein to preserve Winsome's assets and recover improper payments: insofar as Klein alleges that Winsome improperly paid Cornelius, his present claim seeks to accomplish the goals of his appointment. We accordingly conclude the district court had subject matter jurisdiction to resolve Klein's UFTA claim.¹

In resisting this conclusion, Cornelius argues that any relief against third parties must be achieved through either (1) 7 U.S.C. § 13a–2, which empowers state attorneys general to sue on behalf of their defrauded residents, or (2) 7 U.S.C. § 25, which provides a direct cause of action under the CEA for defrauded investors. But Klein is not acting directly on behalf of Winsome's investors. He is suing on Winsome's own behalf.

Cornelius next points to the Third Circuit's decision in CFTC v. American Metals Exchange Corp., 991 F.2d 71, 78 (3d Cir.1993). He argues it holds that a receiver cannot seek to benefit defrauded investors by suing on behalf of the entities that defrauded them. But in that case the court only held the district court had miscalculated the amount of monetary relief. Id. at 77–78. In fact, the Third Circuit actually affirmed the district court's finding that it could impose ancillary relief against a third-party recipient of an unlawful transfer. Id. at 76 (“The district court did not err in imposing the ancillary relief of disgorgement.”).

In sum, the district court had subject matter jurisdiction to resolve claims brought under the UFTA on Winsome's behalf.

2. Standing

Next, Cornelius contends that Klein does not have standing to bring a UFTA claim because Winsome itself cannot bring such a claim. He reasons that because Winsome is unincorporated and was subject to Andres's control, it is a mere alter-ego for Andres and therefore has no capacity to sue in its own right. Although Cornelius concedes Klein could nonetheless...