Scholes v. African Enterprise, Inc.

• Decision Date: 21 June 1994
• Docket Number: No. 90 C 3989.,90 C 3989.
• Citation: 854 F. Supp. 1315
• Parties: Steven S. SCHOLES, not individually but solely as Receiver for Michael S. Douglas, D & S Trading Group, Ltd., Analytic Trading Systems, Inc., Analytic Trading Service, Inc., and Market Systems, Inc., Plaintiff, v. AFRICAN ENTERPRISE, INC., Bethany Evangelical Free Church, Heart Cry International, Hindustan Bible Institute, Inc., International Students, Inc., Proclamation International, Inc., and World Vision, Inc., Defendants.
• Court: U.S. District Court — Northern District of Illinois

854 F. Supp. 1315

Steven S. SCHOLES, not individually but solely as Receiver for Michael S. Douglas, D & S Trading Group, Ltd., Analytic Trading Systems, Inc., Analytic Trading Service, Inc., and Market Systems, Inc., Plaintiff, v. AFRICAN ENTERPRISE, INC., Bethany Evangelical Free Church, Heart Cry International, Hindustan Bible Institute, Inc., International Students, Inc., Proclamation International, Inc., and World Vision, Inc., Defendants.

No. 90 C 3989.

United States District Court, N.D. Illinois, Eastern Division.

June 21, 1994.

COPYRIGHT MATERIAL OMITTED

Wilber H. Boies, Gary L. Prior, Richard Lawton Sandler, Jane M. Simon, Michael V. Hughes, Mary B. Tribby, Mark Thomas Ostrowski, McDermott, Will & Emery, Ruta K. Stropus, Sachnoff & Weaver, Ltd., Chicago, IL, for Steven S. Scholes.

Catherine Patricia Wassberg, Jenner & Block, Timothy C. Klenk, Jerome Kiley Bowman, Ross & Hardies, P.C., Chicago, IL, for African Enterprise, Inc., Bethany Evangelical Free Church, Food for the Hungry, Inc., Hindustan Bible Institute, Inc., International Students, Inc., Proclamation Intern., Inc., Trinity College, Trinity Evangelical Divinity School.

Robert Ronald Tepper, Law Offices of Robert R. Tepper, Chicago, IL, for Camp Elim and Other Youth Ministries of Haiti.

Paul B. Newman, Newaygo, MI, for Gospel Revival Ministries.

Scott H. Kenig, Holleb & Coff, Chicago, IL, for Heart Cry Intern.

C. William Bockelman, Jr., O'Neill & Bockelman, P.C., Lake Forest, IL, Scott H. Kenig, Holleb & Coff, Chicago, IL, for Lake Forest Academy, Calvary Chapel of Chula Vista.

Timothy C. Klenk, Jerome Kiley Bowman, Ross & Hardies, P.C., Chicago, IL, for World Vision, Inc.

James A. Davids, Bruce J. Van Heukelem, Hoogendoorn, Talbot, Davids, Godfrey & Milligan, Chicago, IL, H. Robert Showers, Peter Rathbun, Gammon & Grange, P.C., McLean, VA, for Camp Forest Springs.

MEMORANDUM OPINION AND ORDER

ALESIA, District Judge.

This case arises out of a fraudulent investment scheme perpetrated by Michael S. Douglas ("Douglas") from August 1987 to November 1989. At issue are monetary conveyances made by Douglas, during the pendency of the fraudulent investment scheme, to the defendants, all of which are non-profit corporations. Plaintiff Steven S. Scholes, as Receiver for the defunct investment entities, named sixteen defendants in his First Amended Complaint. Many defendants have settled the claims. Summary Judgment motions are pending against and on behalf of the following seven remaining defendants: (1) Bethany Evangelical Free Church ("Bethany"), (2) World Vision, Inc. ("World Vision"), (3) Proclamation International, Inc. ("Proclamation"), (4) International Students, Inc. ("International Students"), (5) Hindustan Bible Institute, Inc. ("Hindustan"), (6) African Enterprise, Inc. ("African Enterprise") and (7) Heart Cry International ("Heart Cry"). Scholes asserts claims for fraudulent conveyance and unjust enrichment against each.

Presently before the court are (1) the Receiver's Motion for Summary Judgment Against Hindustan Bible Institute, Inc., International Students, Inc., and Proclamation International, Inc., (2) the Receiver's Motion for Summary Judgment Against African Enterprise, Inc. and Bethany Evangelical Free Church, (3) the Receiver's Motion for Summary Judgment Against Heart Cry International and World Vision, Inc., (4) Motion of Certain Defendants namely African Enterprise, Hindustan, International Students, and World Vision for Summary Judgment, and (5) Motion for Summary Judgment of Proclamation International, Inc. and Bethany Evangelical Free Church.

I. FACTS

From August 1987 until November 13, 1989, Douglas and others perpetrated a massive securities fraud, for which Douglas was indicted on June 19, 1990. (certified copy of Indictment (hereinafter "Indictment"), Exhibit A, Reply Mem. In Supp. of Receiver's Mot. for Summ. J. Against African Enterprise, Inc. and Bethany Evangelical Free Church (hereinafter "AE Reply Memo")) The Indictment charged Douglas with seven counts of mail fraud and one count of providing false information to the United States government. On January 11, 1991, Douglas was convicted, pursuant to a guilty plea, of three counts of mail fraud and one count of providing false information to the government, and was sentenced to 12 years in prison. (AE Reply Memo, Exhibit B (certified copy of Judgment in a Criminal Case); Plea Agreement in United States v. Michael S. Douglas, case No. 90 CR 557 (N.D.Ill. October 4, 1990) (hereafter "Plea Agreement"))

Douglas operated the scam by purporting to sell limited partnership interests in three entities now in receivership: D & S Trading Group, Ltd. ("D & S"), Analytic Trading Systems, Inc. ("AT Systems") and Analytic Trading Service, Inc. ("AT Service"). (Pl.'s Stmt. of Material Facts as to Which There is No Genuine Issue with Respect to Hindustan Bible Institute, Inc., International Students, Inc., and Proclamation International, Inc. (hereafter "Pl.'s Hindustan 12(m) Stmt."), at ¶ 5) Douglas had effective control over each of these entities. (Id.; see Dep. Transcript of Douglas (hereafter "Douglas Dep."), pp. 364-65, attached as Exhibit F to the Statement of Material Facts as to which There Is No Genuine Issue With Respect to Heart Cry International, and World Vision, Inc. (hereinafter "Pl.'s Heart Cry 12(m) Stmt.")) Douglas misappropriated funds from these entities and provided public investors with false and misleading information concerning them. (Pl.'s Hindustan 12(m) Stmt., ¶ 6; Plea Agreement ¶ 5) Douglas funded the withdrawal of certain investors' capital and income with other investors' capital, in a classic Ponzi scheme. (Id.)

In January 1987, Douglas was released from incarceration after being convicted on charges relating to previous fraudulent activity. (Douglas Dep., pp. 24, 26-27) Prior to this time, Douglas had been in dire financial straits. (See certified copy of Affidavit of Assets and Liabilities of Michael Douglas, attached to AE Reply Memo as Exhibit C) At the time of his release in January 1987, Douglas, by his own admission, had a negative net worth. (Douglas Dep., pp. 39, 53) Douglas had unpaid judgments totalling $28,166.06 outstanding against him upon his release. (See certified copy of Judgments attached to AE Reply Memo as Exhibit D) None of those judgments has been satisfied. (See Docket Sheets attached to AE Reply Memo as Exhibit E)

From the time he was released from incarceration in January 1987 until the formation of D & S in August 1987, Douglas held two jobs, one with Computerland and one with San Gregorio Partners. (Douglas Dep., pp. 53-55) During this period of time, Douglas earned $3,512.48 from Chicago Metropolitan Computers, Inc. and $6,548.00 from San Gregorio Partners. (See Pl.'s Heart Cry 12(m) Stmt., Exhibit I (1987 federal tax return of M.S. Douglas and J.T. Douglas, pp. 19-20)) Thus, at the time Douglas started D & S he had a negative net worth of at least $18,105.58 — the total of the judgments outstanding against him at the time less his total gross compensation of $10,060.48 from the time he was released until he began D & S.

Douglas embezzled, converted and diverted investor funds from D & S, AT Systems and AT Service. (Pl.'s Hindustan 12(m) Stmt., at ¶ 10; see also Exhibit A, Affidavit of the accountant retained by the Receiver, Richard A. Mark (hereinafter "Mark Affidavit"), attached thereto, at ¶ 3; Plea Agreement ¶ 5) From August 1987 until November 13, 1989, the date the SEC shut Douglas down, Douglas had no source of income other than the money he took from D & S, AT Systems, AT Service and investors. (Douglas Dep., pp. 56-58; Mark Affidavit, ¶ 3) All of Douglas' "net worth" as of November 30, 1989, the date the Receiver was appointed, was attributable to monies Douglas diverted from D & S, AT Systems and AT Service. (Douglas Dep., pp. 57-58; Mark Affidavit, ¶ 3) According to the affidavit of Mr. Mark, the accountant retained by the Receiver, from August 1987 through November 1989 Douglas was insolvent both in the sense that his liabilities exceeded his assets and in the sense that he was unable to pay his debts as they came due. (Mark Affidavit, ¶ 3) Furthermore, according to the Receiver, Douglas failed to retain sufficient property to pay his creditors. (See Affidavit of Steven S. Scholes, attached as Exhibit B to Pl.'s Hindustan 12(m) Stmt. (hereinafter "Scholes Affidavit"), at ¶¶ 2, 3)

Douglas operated D & S, AT Systems and AT Service in sequence. (Pl.'s Hindustan 12(m) Stmt., at ¶ 11) D & S operated from August 1987 until October 1988. (Id.; Douglas Dep., pp. 52, 157-58, 165) D & S purported to be a limited partnership in which interests were sold to the public. (Douglas Dep., pp. 157-58; Plea Agreement ¶ 5) Douglas was held out to be a general partner of D & S. (Douglas Dep., p. 158; Plea Agreement ¶ 5) Numerous investors in D & S executed limited partnership agreements titled "Articles of Limited Partnership Establishing D & S Trading Group, Ltd." (Pl.'s Heart Cry 12(m) Stmt., Exhibit K, at ¶ 2) D & S, however, was never in fact formed as a limited partnership. (See Pl.'s Heart Cry 12(m) Stmt., Exhibit L)

Douglas knew in August 1987 that D & S was not properly registered with regulatory authorities. (Douglas Dep., pp. 270-71; Plea Agreement ¶ 5) From the inception of D & S, Douglas misappropriated monies from D & S and used them for his personal purposes, but he did not replace the funds and he did not disclose the diversions to investors. (Douglas Dep., pp. 193-99; Mark Affidavit, ¶ 3; Plea Agreement ¶ 5) Douglas knew these diversions were illegal. (Douglas Dep., pp. 199-200)

AT Systems began operations in approximately September 1988, simultaneous with the closing of D & S. (Mark Affidavit, ¶¶ 4, 5) Douglas was an officer, sole shareholder of, and person with control over, AT Systems. (Douglas Dep., pp. 249-50) Substantially all the funds invested in D & S were reinvested in AT...