Warfield v. Alaniz

• Decision Date: 24 June 2009
• Docket Number: No. 07-16377.,No. 07-15586.,07-15586.,07-16377.
• Parties: Lawrence J. WARFIELD, Plaintiff-Appellee, v. Michael ALANIZ, Defendant, and Leonard Bestgen; Betty Bestgen; Robert Carroll; Charles Davis; Patrick Wehrly; Andrea Wehrly, Defendants-Appellants. Lawrence J. Warfield, Plaintiff-Appellant, v. Michael Alaniz, Defendant, and Leonard Bestgen; Betty Bestgen; Robert Carroll; Rudy Opinion Crosswell; Mary Crosswell; Charles Davis; Paul Richard Patrick Wehrly; Andrea Wehrly, Defendants-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

569 F.3d 1015

Lawrence J. WARFIELD, Plaintiff-Appellee, v. Michael ALANIZ, Defendant, and Leonard Bestgen; Betty Bestgen; Robert Carroll; Charles Davis; Patrick Wehrly; Andrea Wehrly, Defendants-Appellants.

Lawrence J. Warfield, Plaintiff-Appellant, v. Michael Alaniz, Defendant, and Leonard Bestgen; Betty Bestgen; Robert Carroll; Rudy Opinion Crosswell; Mary Crosswell; Charles Davis; Paul Richard Patrick Wehrly; Andrea Wehrly, Defendants-Appellees.

No. 07-15586.

No. 07-16377.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted October 23, 2008.

Filed June 24, 2009.

Burton M. Bentley, The Bentley Law Firm, P.C., Phoenix, AZ, for the defendants-appellants/appellees.

Alisan M.B. Patten, Patrick M. Murphy, W. Mark Sendrow and Ryan W. Anderson, Guttilla Murphy Anderson, P.C., Phoenix, AZ, for the plaintiff-appellee/appellant.

Appeals from the United States District Court for the District of Arizona, James A. Teilborg, District Judge, Presiding. D.C. No. CV-03-02390-JAT.

Before: J. CLIFFORD WALLACE, SIDNEY R. THOMAS and SUSAN P. GRABER, Circuit Judges.

THOMAS, Circuit Judge:

This appeal presents the question, inter alia, of whether the charitable gift annuities sold in this case were investment contracts under federal securities law. We conclude they were, and we affirm the judgment of the district court.

I

Not only did Robert Dillie promise his investors "a gift for your lifetime and beyond," he pledged "preservation of the American way of life," "preservation of your assets," and "preservation of the American family." Unless Dillie meant to refer to the way of life perfected by the Boston swindler Charles Ponzi and his family,¹ we can safely say that Dillie's claims were a bit overstated.

The vehicle by which Dillie was to deliver these dreams was a charitable gift annuity, sold through the Dillie-controlled Mid-America Foundation ("Foundation"). From 1996 until 2001, the Foundation sold its charitable gift annuities through financial planners, insurance agents, and others, including the Defendants in this lawsuit.

The Foundation's marketing literature assured investors that they would receive a lifetime stream of income, with the money remaining at their death directed to a charity designated by the investor. The promotion was initially an enormous success for Dillie; the return for the investors was not. In all, the Foundation raised $55 million dollars from the sale of more than 400 charitable gift annuities. Unfortunately, the business model was simply a Ponzi scheme² in which, rather than investing the investors' funds, the Foundation used the investors' funds to make annuity payments to earlier annuitants, commission payments to facilitators, and payments to Dillie and others for personal expenses (including Dillie's gambling expenses). Although it collected millions in investments, the Foundation quickly became insolvent. With a few minor exceptions, no charitable contributions were ever made, and the scheme collapsed in 2001.

Shortly after the collapse, the Securities and Exchange Commission filed a civil complaint against Dillie. The district court appointed Lawrence Warfield ("Receiver") as Receiver for Receivership Assets in order to "prevent waste and dissipation of the assets of the Defendants to the detriment of investors." Dillie was subsequently indicted and ultimately pled guilty to several counts of wire fraud and money laundering. He was sentenced to 121 months in prison.

The Receiver filed the instant complaint seeking the return of commissions paid to agents by the Foundation for the sale of the charitable gift annuities. The Receiver alleged breach of fiduciary duty, constructive fraud in confidential relationship, negligence and gross negligence, common law fraud, federal and state security fraud, actual and constructive fraudulent transfer, conversion, and unjust enrichment.

The district court denied the Receiver's motion for summary judgment on the fraudulent transfer claim and denied Defendants' motion for summary judgment on all but the common law fraud claim. Warfield v. Alaniz, 453 F.Supp.2d 1118 (D.Ariz.2006). It also denied Defendants' request to dismiss the non-resident Defendants for lack of personal jurisdiction, finding that it had personal jurisdiction over them under 15 U.S.C. § 78aa, which confers nationwide service of process in suits to enforce liabilities or duties created under the Securities Exchange Act of 1934. Id. at 1128-29.

After a seven-day jury trial, the jury found for the Receiver on the federal and state securities law, constructive fraud, negligence per se, and unjust enrichment claims and for Defendants on the general negligence, conversion, and fraudulent transfer claims. Defendants were ordered to pay damages ranging from $31,900 to $109,900 per person. Defendants timely appealed the judgment, and the Receiver filed a protective cross-appeal from the district court's denial of summary judgment on the fraudulent transfer claim.³

We review de novo the district court's denial of a motion for summary judgment, Moreno v. Baca, 431 F.3d 633, 638 (9th Cir.2005), as well as the district court's determination that the charitable gift annuities were investment contracts,⁴ see United States v. Carman, 577 F.2d 556, 562 (9th Cir.1978) ("Although characterization of a transaction raises questions of both law and fact, the ultimate issue of whether or not a particular set of facts, as resolved by the factfinder, constitutes an investment contract is a question of law.").

II

The district court correctly held that the Foundation's charitable gift annuities were investment contracts subject to regulation as securities under Section 2(a)(1) of the Securities Act of 1933 ("1933 Act"), 15 U.S.C. § 77b(a)(1), and Section 3(a)(10) of the Securities Exchange Act of 1934 ("1934 Act") (collectively with the 1933 Act, "Securities Acts"), 15 U.S.C. § 78c(a)(10).⁵

A

Our analytical framework is governed by the Supreme Court's guidance in SEC v. W.J. Howey Co., 328 U.S. 293, 66 S.Ct. 1100, 90 L.Ed. 1244 (1946). Under the Howey test, "an investment contract for purposes of the Securities Act means a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party." Id. at 298-99, 66 S.Ct. 1100. In Howey, the Supreme Court found an "investment contract" present where promoters sold acreage with fruit trees on it as well as "service contracts" to cultivate and market the crops, with an allocation of the net profits going to the purchaser. The Howey Court noted that its definition of investment contract "embodies a flexible rather than a static principle, one that is capable of adaptation to meet the countless and variable schemes devised by those who seek the use of the money of others on the promise of profits." Id. at 299, 66 S.Ct. 1100.

We distilled Howey's definition into a three-part test requiring "(1) an investment of money (2) in a common enterprise (3) with an expectation of profits produced by the efforts of others." SEC v. Rubera, 350 F.3d 1084, 1090 (9th Cir.2003) (internal quotation marks omitted). The third prong of this test, requiring "an expectation of profits produced by the efforts of others," involves two distinct concepts: whether a transaction involves any expectation of profit and whether expected profits are the product of the efforts of a person other than the investor.⁶

In applying the Howey test, we are mindful of the remedial purpose of the Securities Acts, as well as the Supreme Court's repeated rejection of a narrow and literal reading of the definition of securities. See, e.g., Reves v. Ernst & Young, 494 U.S. 56, 60, 110 S.Ct. 945, 108 L.Ed.2d 47 (1990) (noting that, "[i]n defining the scope of the market that it wished to regulate [via the federal securities laws], Congress painted with a broad brush"); Tcherepnin v. Knight, 389 U.S. 332, 336, 88 S.Ct. 548, 19 L.Ed.2d 564 (1967) ("[I]n searching for the meaning and scope of the word `security' in the Act, form should be disregarded for substance and the emphasis should be on economic reality."); SEC v. C.M. Joiner Leasing Corp., 320 U.S. 344, 351, 64 S.Ct. 120, 88 L.Ed. 88 (1943) ("Novel, uncommon, or irregular devices, whatever they appear to be, are also reached if it be proved as matter of fact that they were widely offered or dealt in under terms or courses of dealing which established their character in commerce as `investment contracts,' or as `any interest or instrument commonly known as a `security.'").

Applying these principles to the case at hand, we note that it is undisputed that, as the district court explained:

[T]he investors paid money to Mid-America through an irrevocable gift of cash, securities, or other assets. In return, Mid-America promised to pool the money in investments such as stocks, bonds, and money market funds, and to periodically pay each of the investors a fixed sum of money based on their individual ages and the date that payment commenced. In addition to a monthly income stream, the investors expected to receive substantial tax benefits resulting from their purchase of the CGAs.

Warfield, 453 F.Supp.2d at 1123-24. It is also undisputed that the Foundation's literature promised that monies remaining after the named annuitants' lifetime would be directed to a charity designated by those who purchased the charitable gift annuities.

Defendants argue that the investors did not make any "investment of money" within the meaning of Howey because they lacked the requisite intent to realize financial gain through the transactions, and intended instead to make charitable donations. In addition, and relatedly, Defendants argue that the investors had no "expectation of profits" because the anticipated value of the gift annuities at the time of purchase was always less than the purchase amount. Defendants do not dispute that there...