State v. Quiros, 2018-251

• Decision Date: 04 October 2019
• Docket Number: No. 2018-251,2018-251
• Court: Vermont Supreme Court
• Parties: State of Vermont, et al. v. Ariel Quiros, et al.

2019 VT 68

State of Vermont, et al. v. Ariel Quiros, et al.

No. 2018-251

Supreme Court of Vermont

April Term, 2019

October 4, 2019

NOTICE: This opinion is subject to motions for reargument under V.R.A.P. 40 as well as formal revision before publication in the Vermont Reports. Readers are requested to notify the Reporter of Decisions by email at: JUD.Reporter@vermont.gov or by mail at: Vermont Supreme Court, 109 State Street, Montpelier, Vermont 05609-0801, of any errors in order that corrections may be made before this opinion goes to press.

On Appeal from Superior Court, Washington Unit, Civil Division

Mary Miles Teachout, J.

Thomas J. Donovan, Jr., Attorney General, and Kate T. Gallagher, Assistant Attorney General, Montpelier, for Plaintiffs-Appellees.

Russell D. Barr, Chandler W. Matson and Benjamin E. Novogroski of Barr Law Group, Stowe, for Intervenor-Appellants Antony Sutton, et al.

PRESENT: Reiber, C.J., Skoglund, Robinson, Eaton and Carroll, JJ.

¶ 1. CARROLL, J. Intervenors, a group of foreign investors who were allegedly defrauded by defendants, appeal an order denying their motion to intervene in the State's enforcement action brought against defendants. We affirm because the motion to intervene was untimely.

I. Factual and Procedural Background

¶ 2. This case arises from a series of plans overseen by defendants to develop several real estate projects in the Northeast Kingdom of Vermont. Work on these projects spanned eight years, including fundraising and planning stages, and involved several limited partnerships and other corporate entities (the Jay Peak Projects). The Jay Peak Projects, at the direction of defendants Ariel Quiros and William Stenger, raised investment funds largely through a federal program known as the EB-5 Immigrant Investor Program (EB-5 Program). See generally 8 U.S.C. § 1153(b)(5). Under the EB-5 Program, foreign investors receive a path to expedited United States residency in exchange for a $500,000 investment in a qualifying project. After making the initial investment, investors receive conditional residency in the United States, which, under the program, converts into permanent residency if, among other conditions, the investment can be traced to the creation or preservation of ten jobs over a two-year period. Here, investments were made in limited partnership interests, as offered by the Jay Peak Projects to foreign investors in seven different projects, referred to as Phases I through VII.

¶ 3. On April 12, 2016, the Securities and Exchange Commission (SEC) brought an enforcement action in federal court against the Jay Peak Projects and the two principal directors—Quiros and Stenger—alleging federal securities law violations. The SEC alleged that instead of properly allocating the EB-5 investment funds raised by defendants to support the development of the projects as advertised, defendants Quiros and Stenger misappropriated and improperly commingled the investment funds in a series of accounts. The next day the federal court granted the SEC's ex parte request for the appointment of a receiver to "administer and manage the business affairs, funds, assets, causes in action and any other property of the [Jay Peak Projects entities]; marshal and safeguard all of their assets; and take whatever actions are necessary for the protection of the investors." In addition, the federal court issued a bar order enjoining all persons with notice of the order from prosecuting any actions or proceedings that involved the receiver or affected the property of the named defendants.

¶ 4. Among the approximately 800 individuals who invested with defendants under the EB-5 Program are five foreign nationals who each invested $500,000 and paid an additional administrative fee of $50,000. These investors seek to intervene here. Intervenors also purport to represent a similarly situated class encompassing others who made investments with defendants.

¶ 5. In the SEC case, the receiver settled with Raymond James and Associates—an institution at which Quiros maintained several accounts that were funded with and used to transfer EB-5 investment funds—for $150,000,000. The receiver used these funds from Raymond James to offer reimbursement to intervenors for the $500,000 principal that they had invested with the Jay Peak Projects. However, the receiver concluded that the $50,000 administrative fee was "not subject to reimbursement." According to one of the offering documents, this fee was intended to be "nonrefundable" to reimburse the general partner involved in that project for "expenses incurred" during the "development of the Project, business planning, and to produce and distribute this Offering."

¶ 6. Two intervenors—so-called Phase I investors—released any interest in recovering the $50,000 administrative fee in return for the recovery of their investment principal, while two other intervenors expressly reserved their right to recover the fee. The last intervenor also did not release his interest in the administrative fee and refused to accept reimbursement from the receiver for the principal of his investment. The receiver has represented that he will pay this intervenor his $500,000 principal investment if he "wish[es] to accept payment."

¶ 7. On April 14, 2016, two days after the SEC case was filed, the State of Vermont brought its own enforcement action in state court—the current case—seeking, among other things, "full restitution to all defrauded investors" and the return of illegally obtained investment funds from Quiros and Stenger in their individual capacities and from a series of business entities involved in the projects. The State alleged multiple violations under the Vermont Uniform Securities Act (Chapter 150 of Title 9) and the Consumer Protection Act (Chapter 63 of Title 9). The parties engaged in motion practice and discovery proceedings lasting nearly two years. This included the production of over one million pages of documents.

¶ 8. On appeal, intervenors highlight a series of events that took place starting in early 2018. On February 16, 2018, the State filed two motions seeking both temporary and permanentorders freezing defendants' assets. The trial court set an emergency hearing on the motion for temporary asset freeze for February 23, 2018. On that date, the parties filed a stipulation, pursuant to which the temporary freeze went into immediate effect pending further briefing on the motion for a permanent order. In March and April 2018, the parties fully briefed the State's permanent asset-freeze motion, culminating in a hearing on April 4, 2018, at which the court granted the motion. On April 9, 2018, the court issued an order freezing a significant portion of Quiros's assets. This order took effect immediately following the expiration of the asset-freeze order imposed by the federal court in the SEC enforcement case.

¶ 9. Meanwhile, commencing in May 2017, intervenors, as named plaintiffs representing similarly situated investors purportedly defrauded by Quiros, Stenger, and the Jay Peaks Project entities, sued the State of Vermont and several current and former state officials and employees alleging breach of contract based upon a state-run EB-5 investment processing center's alleged failure to sufficiently oversee the project to prevent the purported fraud. On April 20, 2018, the superior court dismissed that case for failure to state a claim. Intervenors have appealed that decision to this Court.¹

¶ 10. On May 15, 2018, just over two years since the filing of the state enforcement action, intervenors moved under Vermont Rule of Civil Procedure 24(a) and (b) to intervene in this action.² Intervenors sought the "full recovery of any judgment obtained in this action" and the "[d]isgorgement and restitution of all earnings, profits, compensation and benefits." They also sought, from both the State and defendants, "[p]unitive damages . . . on account of the outrageous nature of Plaintiffs' and Defendants' willful and wanton disregard for [Intervenors'] rights."

¶ 11. The superior court denied the motion to intervene. First, the court concluded that intervenors did not demonstrate an interest in the case that would be impaired if they were not permitted to intervene. Second, the court was not convinced that intervenors' claims "line[d] up with" the claims of the existing parties to the case. Third, the court expressed concern that intervenors' claims would introduce collateral issues, which would delay the outcome of the case resulting in prejudice to the existing parties. Fourth, the court noted that intervenors "have a lawsuit of their own in process." Fifth, despite intervenors' assertion to the contrary, the court concluded that the federal receiver was properly protecting their interests. Finally, the court noted that intervenors could potentially violate the federal bar order if they were permitted to intervene. The court did not directly discuss the timeliness of the attempted intervention.

¶ 12. On July 12, 2018, a few days after the court denied the motion to intervene, the State, Quiros, and Stenger filed a stipulation agreeing to settle the statutory claims in this case. Under the terms, Quiros agreed to pay the State $2,000,000 and Stenger agreed to pay $100,000. The State released all claims against Quiros and Stenger, neither of whom admitted to or denied liability. Among other conditions, the stipulation required Quiros to transfer five Vermont properties to the State. The funds obtained as a result of this stipulation were to be reinvested in the Northeast Kingdom to spur economic development in the region, which suffered as a result of defendants' actions.

¶ 13. On appeal, intervenors argue that the superior court improperly denied their motion to intervene as of right under Rule 24(a). They assert that their motion to intervene only became "colorable" once the court's freeze order took effect, which created a "pool of money" that could be used to satisfy...