Sender v. Mann
| Decision Date | 20 March 2006 |
| Docket Number | No. CIVA01CV02315LTBOES.,CIVA01CV02315LTBOES. |
| Citation | 423 F.Supp.2d 1155 |
| Parties | In re: Harvey SENDER, Trustee of the Lifeblood Biomedical, Inc. Liquidation Trust and Harvey Sender, Trustee of the Lifeblood Biomedical, Inc., Opt-In Trust, Plaintiffs, v. William Jeffrey MANN, an individual, William Wells II, an individual, Freeborn & Peters, an Illinois partnership, Michael Sabian, an individual, Darwin J. Poyfair, an individual, Merkle & Magri, a Florida professional association, James R. Leone, P.A., a Florida professional association, James R. Leone, an individual, and The William & Elaine Wells Family Limited Partnership, a Florida limited partnership, Defendants. |
| Court | U.S. District Court — District of Colorado |
John C. Smiley, Theodore James Hartl, Ann H. Cisneros, Lindquist & Vennum, P.L.L.P., Denver, CO, for Plaintiffs.
Carolyn J. Fairless, Julie M. Walker, Michael L. O'Donnell, Wheeler Trigg Kennedy LLP, Denver, CO, James R. Leone, James R. Leone, P.A., Edgewater, FL, for Defendants.
James R. Leone, James R. Leone, P.A., Edgewater, FL, Pro se.
This Order addresses the motion by plaintiff Harvey Sender ("Sender") for summary judgment dismissal of numerous affirmative defenses and counterclaims pled by defendants Freeborn & Peters, Michael Sabian and Darwin J. Poyfair (collectively the "Freeborn defendants"), and James R. Leone, P.A. and James R. Leone (the "Leone defendants.") (Dckt.# 455), and also the Freeborn defendants motion for summary judgment on Sender's claims for lack of standing, filing outside of the statute of limitations, pleading claims not cognizable under Colorado law and lack of evidence to support essential elements of his claims. (Docket # 500). For the reasons discussed below Sender's motion is DENIED in part and GRANTED in part, and the Freeborn Defendants' motion is DENIED in part and GRANTED in part.
This case concerns an alleged ponzi scheme perpetrated by defendants William Jeffrey Mann ("Mann") and William Wells II ("Wells") from 1996 until about 1998. A ponzi scheme is defined as "a fraudulent investment scheme in which `profits' to investors are not created by the success of the underlying business venture but instead are derived from the capital contributions of subsequently attracted investors." Sender v. Simon, 84 F.3d 1299, 1301 fn. 1 (10th Cir.1996). Wells and Mann organized and operated four business entities (referred to collectively herein as "Lifeblood") that issued phony promissory notes to investors. The scheme hinged on the portrayal of Lifeblood as a legitimate, and viable, medical related business in order to promote and sell these notes. The notes were presented as sound investments, backed by appropriate insurance. In fact, the notes were not insured. Two sets of promissory notes were issued, one in 1997 and one in 1998. When the ponzi scheme collapsed in 1998, the noteholders, about 200, had lost the money they paid for the notes and were left holding worthless notes.
On July 26, 2000 Lifeblood filed voluntary petitions for reorganization under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of Colorado ("Bankruptcy Court"). On or about June 11, 2001, the Bankruptcy Court entered its Confirmation Order confirming The Proponents' First Amended Joint Plan of Liquidation for the Debtors (the "Plan.") The Plan calls for the creation of the Liquidation Trust, the Trust established to collect and liquidate all of the assets of the debtor entity, Lifeblood; and the Opt-in Trust, the Trust established to pursue the interests of and recover funds owed to the defrauded note-holders. The Plan designates Sender as Trustee of both the Liquidation Trust and the Opt-in Trust. Most of the note-holders, as beneficiaries of the Opt-in Trust, have assigned their individual claims to the Opt-in Trust. Sender filed this action on November 30, 2001, alleging 35 claims in state and federal law on behalf of Lifeblood and on behalf of the note-holders, Lifeblood's creditors.
The Freeborn defendants and the Leone defendants are lawyers who did legal work for Mann and Wells. The Freeborn defendants are the Chicago-based law firm of Freeborn and Peters, and Michael Sabian ("Sabian") and Darwin Poyfair ("Poyfair"), two lawyers at Freeborn and Peters. The Leone defendants are James R. Leone, P.A., a Florida professional association, and James R. Leone, an attorney operating as a solo practitioner in Florida. Sender's remaining claims against them are for breach of fiduciary duty, aiding and abetting breach of fiduciary duty, aiding and abetting fraud, malpractice, violations of the Colorado Organized Crime Control Act ("COCCA"), fraudulent transfer (actual and constructive) and conspiracy.
This Order addresses two motions for summary judgment. The first motion is by Sender, seeking summary judgment on numerous defenses and counterclaims raised by the Freeborn and Leone defendants. The second motion is by the Freeborn defendants, seeking summary judgment on several of Sender's claims. Since the motion by the Freeborn defendants argues the absence of a factual basis for many of Sender's claims, I will review the facts regarding their involvement with Lifeblood in some detail.
Sabian first met Mann in 1996 and first became aware of Mann's unorthodox financial dealings in 1997. Sabian was doing legal work for a client of Mann's, and learned that Legend Sports, an entity with which Mann was affiliated, had encountered difficulties using promissory notes to raise funds because Florida securities officials treated these notes as securities.
Sabian first did legal work for a Lifeblood entity, New Millennium, in March of 1997, helping New Millennium develop Limited Liability Partnerships to raise money. In June of 1997, Sabian spoke to a Lifeblood broker who told Sabian that some states had construed promissory notes as securities, and inquired whether the LLPs would have similar problems. In August of 1997, Sabian prepared a membership summary for a Lifeblood investment vehicle, Bio Bank, which stated falsely that Lifeblood owned a facility in Vancouver. Sabian later stated that he relied on Wells for this information and did not know it was false.
In September of 1997, Sabian and Poyfair did legal work for Mann associated with an SEC subpoena regarding the Legend Sports promissory notes. In April of 1998, Poyfair became aware that regulators in North Carolina had issued a subpoena to Mann requesting information regarding the Lifeblood promissory notes. In August of 1998, Sabian assisted Mann and Wells in developing a mixed promissory note and LLP venture, Cardiac Care, which used the same agents and customers as Lifeblood. Significantly, the record does not show any involvement by the Freeborn defendants in preparing or assisting in preparing the promissory notes that were the basis for the ponzi scheme.
On October 7, 1998, the Freeborn defendants received a retainer fee of $300,000 from Lifeblood for legal fees. Then, on October 14, 1998 Sabian and Poyfair learned that Mann had been indicted for his role in Legend Sports. At about this same time, Sabian learned that Lifeblood had severe financial difficulties and had no source of income to repay its note-holders. The Freeborn defendants helped Lifeblood develop a "script" for note-holders stating that Lifeblood was in negotiations with another company to purchase Lifeblood's assets. The script did not disclose that this same company had earlier rejected a similar deal with Lifeblood. While one of the scripts may have contained false statements, there is nothing in the record that shows that any of the Freeborn defendants were aware that any information in the scripts was false.
On November 24, 1998 Poyfair first learned from Mann that the bonding companies backing up the promissory notes were phony. Poyfair informed Mann of the criminal implications of his conduct, and advised him to retain criminal counsel. The Freeborn defendants determined that they were ethically bound to withdraw from representing Lifeblood unless Mann turned himself in. The record is not clear precisely when Mann turned himself in.
On December 3, 1998 the Freeborn defendants wired $100,000 of their retainer from Lifeblood to Mann's personal criminal defense lawyer. On July 29, 1999 the Freeborn defendants disbursed almost $30,000 of these funds directly to Mann. In March of 2000, the Freeborn defendants transferred more than $123,000 of the remaining Lifeblood funds to Poyfair's new law firm, Snell & Wilmer. About $69,000 was retained as legal fees by Freeborn and Peters.
The Freeborn defendants move for summary judgment under Fed.R.Civ.P. 56. Sender also brings his motion as a motion for summary judgment, but the motion implicates a motion to strike under Fed R.Civ.P. 12(f), and a motion for judgment on the pleadings, under Fed.R.Civ.P. 12(c). Since all of the Freeborn motion and most of the Sender motion is presented under Rule 56, that standard is set out here. The standards of review relevant to Sender's arguments that are not motions for summary judgment are set out below where those specific arguments are addressed.
The purpose of a summary judgment motion is to assess whether trial is necessary. White v. York Int'l Corp., 45 F.3d 357, 360 (10th Cir.1995). I shall grant summary judgment if the pleadings, depositions, answers to interrogatories, admissions, or affidavits show there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c). A fact is material if it might affect the outcome of the suit under the governing substantive law. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). The non-moving party has the burden of showing that there are issues of material fact to be...
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