Terry v. June
| Decision Date | 27 February 2006 |
| Docket Number | No. Civ.A. 3:03CV00052.,Civ.A. 3:03CV00052. |
| Parties | Roy M. TERRY, Jr., et al., Plaintiffs, v. Virginia M. JUNE, Guardian for Robert F. June, Sr., Defendant. |
| Court | U.S. District Court — Western District of Virginia |
Douglas Alan Scott, John C. Smith, Durrette Bradshaw, Richmond, VA, for Plaintiffs.
Peter Booth Vaden, Attorney at Law, Charlottesville, VA, for Defendant.
Before the Court is the Defendant's Motion for Reconsideration of Interlocutory Order on Choice of Law, filed on October 31, 2005. In this motion, the Defendant, Virginia M. June, Guardian for Robert F. June, Sr., moves the Court to reconsider and amend its order of February 23, 2005 in which presiding United States District Judge James Michael held that federal common law, in the form of the Uniform Fraudulent Transfer Act, would govern the Receiver's claim of fraudulent conveyance. See Terry v. June, 359 F.Supp.2d 510 (W.D.Va.2005). The Receiver opposes this motion and oral arguments have been heard on the matter. The issue, therefore, is ripe for decision. For the reasons discussed below, the Court will grant the Defendant's motion.
The Receiver brought this action under Section 22(a) of the Securities Act of 1933, 15 U.S.C. § 77v(a) and Section 2 of the Securities Exchange Act of 1934, 15 U.S.C. § 78aa. The Receiver is acting pursuant to the designation of the Court and under the aegis of the overarching civil action Securities and Exchange Commission v. Terry L. Dowdell, Case No. 3:01CV00116, to recover funds illegally disbursed by Dowdell while operating a Ponzi scheme in violation of the Acts. Sections 77v(a) and 78aa vest in the federal courts exclusive jurisdiction over all suits in law and equity brought to enforce any liability or duty created by the Acts. This court, therefore, has a special brand of pendant jurisdiction over the state-law claims set forth in the Receiver's complaint. Those claims are unjust enrichment (Count One), accounting of funds (Count Two), money had and received (Count Three), and fraudulent conveyance of property (Count Four).
On July 2, 2004, the Receiver filed a Motion for Partial Summary Judgment wherein he moved the Court to, inter alia, establish that the choice of fraudulent conveyance law is determined under the laws of the forum state and that this points to Michigan's version of the Uniform Fraudulent Transfer Act ("UFTA") as the applicable law. In the alternative, the Receiver argued that the UFTA should be applied pursuant to federal common law. On February 23, 2005, the late Judge Michael determined that federal common law, in the form of the UFTA, applied to the case. On March 4, 2005, the Defendant moved the Court to amend its order and certify the choice of law issue for appeal. The Court denied that motion on April 5, 2005. On August 25, 2005, this case was reassigned to the undersigned United States District Judge. The Defendant then filed a motion on October 31, 2005 in which he moved the Court to reconsider the earlier choice of law ruling.
The factual background surrounding the Ponzi scheme operated by Terry L. Dowdell is familiar to the Court. Beginning in April 1998 and continuing through 2001, Dowdell operated a classic Ponzi scheme through a Bahamian based corporation known as the Vavasseur Corporation ("Vavasseur"). Dowdell marketed Vavasseur to investors as a business entity involved in trading medium-term debentures and other private bank debt. To perpetuate his scheme, Mr. Dowdell would simply use the money contributed by the newest investors to pay earlier investors their promised "profits." He would then misappropriate the remaining funds, transferring at least $29 million to business associates, family, and friends. In January 2001, the Securities and Exchange Commission ("SEC"), later joined by the Federal Bureau of Investigation, initiated an investigation into the Vavasseur program. The investigation to date has identified at least seventy-six direct investors, with an undetermined number of subinvestors, who contributed to the fraudulent investment program. While the exact amount of investors' loss is as yet unknown, it is estimated to exceed $121 million.
To facilitate recovery of these losses, Judge Michael appointed Roy M. Terry, Jr. and the law firm of DuretteBradshaw PLC as Receiver for Terry L. Dowdell and his various business entities. The Receiver filed this action against Robert F. June, Sr., on June 10, 2003, asserting claims of unjust enrichment and fraudulent conveyance.1 The Receiver claims that the Defendant was a Vavasseur investor, but that unlike many such investors, the amount of his investment was repaid in full. In addition to the recovery of investment principal, the Receiver asserts that he received substantial "earnings" on his Vavasseur investment and that he knew or should have known that these "profits" were the proceeds of a scheme to defraud subsequent investors rather than genuine investment profits.
The facts relevant to the choice of law issue are largely not in dispute. From April 1998 through March 2000, Dowdell operated Vavasseur out of Florida, where he lived. In March 2000, Dowdell moved his residence and place of business to Charlottesville, Virginia, where he continued to operate Vavassuer. From April 1998 through March 2001, investor funds were initially deposited into accounts under Dowdell's control at Amsouth Bank in Largo, Florida. Dowdell retained direct control over Vavasseur until March, 2001, when, in an attempt to stop an investigation by the United States Securities and Exchange Commission ("SEC"), he purportedly transferred his interest in Vavasseur to a third party and told the SEC that he had repaid all U.S.-based investors. Despite these representations, Dowdell continued to operate Vavasseur through his associates in the United Kingdom, Shindar Gangar and Alan White. Also, Dowdell stopped using the Amsouth Bank accounts at this point, although he continued accepting investor funds at foreign banks and U.S. accounts under his control at Chase Manhattan Bank in New York and Bank of America in Virginia.
After November 2001, Vavasseur investors were directed to wire their investments to accounts in Guernsey, the Commonwealth of Dominica, Israel, and Ireland. From this point on, all distributions made to Vavasseur investors were made from foreign bank accounts.
On November 19, 2001, the SEC filed a civil enforcement suit against Dowdell and moved to freeze the foreign bank accounts identified from Vavasseur's financial records. This freeze created severe cash flow problems for Vavasseur, leading it to promise investors in April 2002 that a reorganization would occur and cause yields to increase to over 100% per annum. This reorganization never occurred and the Vavassuer Ponzi scheme soon collapsed.
The Defendant began investing in Vavasseur in November 1999. Between November 1, 1999 and February 9, 2001, he invested a total of $500,000 in Vavassuer. On December 8, 1999, the Defendant received the first of several checks drawn on Dowdell's Florida bank account. These checks were mailed from Dowdell's Florida office to the Defendant's address in Michigan. The Defendant continued to receive checks and wire transfers from Dowdell's Florida bank account after Dowdell moved to Virginia in March 2000. By March 7, 2001, the Defendant had received fifteen profit distributions amounting to $312,862.50.
On March 21, 2001, the Defendant's principal was returned in connection with Dowdell's attempt to convince the SEC that Vavasseur was no longer dealing with funds from U.S. investors. However, on March 22, 2001, the Defendant reinvested his $500,000 principal by sending it through an intermediary bank account in the Bahamas under the control of VRJ, Ltd.2 On August 8, 2001, Dowdell sent the Defendant a $36,000 profit distribution. This distribution was not sent directly to the Defendant. Instead, it was sent to VRJ, Ltd.'s account in the Bahamas. The Defendant then received this distribution as a payment from VRJ, Ltd. on August 15, 2001. On December 20, 2001, June, Sr., recovered his $500,000 investment principal. By that time he had received a total of $348,862.50 in Vavasseur profit distributions.
The Defendant moves the Court to reconsider the choice of law determination made by Judge Michael on February 23, 2005. In that decision, Judge Michael eschewed the traditional two-step choice of law inquiry, whereby a court first determines the applicable choice of law rule and then applies it to the facts of the case, and found that application of substantive federal common law was appropriate in this case. Judge Michael's opinion began by recognizing the command of Erie R.R. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938), that federal courts apply state law to state law claims over which they have jurisdiction. The opinion also acknowledged that cases where a court may fashion a federal rule of decision are "few and restricted" and limited to those instances presenting a "significant conflict" between federal interests and the application of state law. Terry, 359 F.Supp.2d at 517-518 (quoting O'Melveny & Myers v. FDIC, 512 U.S. 79, 87, 114 S.Ct. 2048, 129 L.Ed.2d 67 (1994)). However, Judge Michael went on to find that the instant case presented such a conflict, thereby justifying the use of federal common law over claims which would otherwise be grounded in state law. Id. at 518.
Judge Michael's opinion cited three ways in which federal interests were at odds with application of state law. First, the Court reasoned that there was a "strong need for uniformity in the treatment of the Receiver's various claims against those who allegedly received fraudulent transfers from the Dowdell fraud scheme."...
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