Warfield v. Byron

Decision Date17 January 2006
Docket NumberNo. 04-10796.,No. 04-11041.,04-10796.,04-11041.
PartiesLawrence J. WARFIELD, as the Receiver for Resource Development International, et al., Plaintiff-Appellee, v. Bob L. BYRON; et al., Defendants, Charles Littlewood, Defendant-Appellant. Lawrence J. Warfield, as the Receiver for Resource Development International, et al., Plaintiff-Appellee, v. Bob L. Byron; et al., Defendants, Larry P. Johnson, Defendant-Appellant.
CourtU.S. Court of Appeals — Fifth Circuit

Kelly Mitchell Crawford (argued), Charlene Cantrell Koonce, Scheef & Stone, Dallas, TX, for Warfield.

Greggory Scott Williams (argued), Houston, TX, for Littlewood.

John Michael Frick (argued), Richardson, TX, for Johnson.

Appeals from the United States District Court for the Northern District of Texas.

Before JONES, Chief Judge, and DeMOSS and OWEN, Circuit Judges.

EDITH H. JONES, Chief Judge:

Two investors in a Ponzi scheme were sued for fraudulent transfers because they received significantly more funds from the scheme than they invested. Further, when granting summary judgment for the receiver of the entities involved in the scheme, the district court gratuitously declared that the judgments against the investors would be nondischargeable in bankruptcy.

On appeal, the receiver concedes that the district court's premature ruling on nondischargeability must be vacated, and we concur. Because the investors' other challenges to the judgments are meritless including the contention that they may not be sued as transferees under the UNIFORM FRAUDULENT TRANSFER ACT, we AFFIRM the monetary judgments and VACATE the order declaring nondischargeability of the judgments in bankruptcy.

I. PROCEDURAL BACKGROUND

In an underlying lawsuit styled SEC v. Res. Dev. Int'l, Civ. No. 3:02-CV-0605 (N.D.Tex.), the Securities and Exchange Commission ("SEC") alleged that James Edwards, David Edwards, and others operated Research Development International, LLC and related entities (collectively "RDI") as a fraudulent Ponzi scheme. The district court in Resource Development appointed a Receiver, Lawrence J. Warfield, for RDI.

On June 28, 2002, the district court in Resource Development authorized the Receiver to sue a number of individuals and entities to recoup receivership assets. Littlewood and Johnson were thus named as defendants in a case alleging, inter alia, claims under the UNIFORM FRAUDULENT TRANSFER ACT ("UFTA").

Littlewood was served on August 11, 2002. His motions, filed with counsel, to dismiss the original complaint and then the Receiver's First Amended Complaint, were denied. Littlewood filed no answer to the Receiver's First Amended Complaint, and he raised no affirmative defenses other than those disposed of in his motions to dismiss. He responded to the Receiver's discovery requests, but, due to a lack of funds, soon allowed his counsel to withdraw.

The Receiver moved for partial summary judgment against Littlewood on January 30, 2004. That same day he served a copy of the motion, the brief, and the supporting appendix on Littlewood via regular mail at the address Littlewood's counsel had indicated as Littlewood's last known residence. Littlewood never responded to the Receiver's motion and now asserts that he never received the motion or any of the accompanying documentation. Accepting the Receiver's notice of default, the district court granted a partial summary judgment and certified it as final pursuant to FEDERAL RULE OF CIVIL PROCEDURE 54(b).

Littlewood obtained new counsel within days and sought relief from the judgment pursuant to FEDERAL RULE OF CIVIL PROCEDURE 60(b). His supporting affidavit stated that he had a meritorious defense to the Receiver's claims, but he contested no fact other than the amount he invested. The district court denied Littlewood's motion.

Johnson, like Littlewood, was sued for receiving fraudulent transfers. The Receiver's motion for partial summary judgment against Johnson made four points: (1) The Receivership Entities operated as fraudulent Ponzi schemes, which were insolvent from their inception; (2) Johnson received fraudulent transfers in bad faith; (3) Johnson received a net amount of $1,573,790.50 from the Receivership Entities; and (4) "Facilitating" investments in the RDI Trading Program did not provide any reasonably equivalent value in exchange for the money Johnson received. Johnson contested summary judgment asserting genuine issues of material fact. The district court found to the contrary, granted the motion for partial summary judgment, and certified it as final.

Littlewood's and Johnson's separate appeals have been consolidated for administrative convenience.

II. FACTUAL BACKGROUND

In 1999, some former business associates contacted Littlewood about an offshore trading program (RDI) paying returns of at least four percent per month. Littlewood was told that the income was "manufactured by the government." Littlewood initially invested ten thousand dollars, and after receiving substantial returns, increased his investment. Littlewood then furnished one of the trading program facilitators with a list of business contacts whom they could solicit. Littlewood subsequently contacted parties identified by the facilitator as interested, and he participated in the solicitations. Littlewood performed no other services for RDI, but during his involvement with RDI, he received returns far in excess of his investments.

Johnson first became acquainted with David and James Edwards, two of RDI's principals, in the mid-1990s when Johnson invested in public payphone companies. While most investors lost money on the companies, Johnson received an extraordinarily high return that he attributed to the Edwardses' efforts. The Edwardses subsequently approached Johnson about investing in one of the entities associated with the current Ponzi scheme, Pacific International Limited Partnership ("PILP"), and at some point in 1998, Johnson invested ten thousand dollars in PILP. Johnson understood that PILP operated in conjunction with Dennel Finance, Ltd. ("Dennel") and Ben Cook, and that Dennel and Cook would put his PILP investment "into play."

In March 1999, the SEC obtained an injunction against Dennel and Cook and appointed Warfield as Receiver for Dennel and more than thirty related entities. When Dennel was adjudicated a Ponzi scheme, the Edwardses began to offer RDI and PILP as new, independent investments. Although Johnson apparently believed that RDI was independent of Dennel, he knew before he invested in RDI that: (1) The SEC placed Dennel in receivership; (2) RDI was offered by the same people who had operated PILP through Dennel; (3) RDI's contracts were nearly identical to the illegal Dennel and PILP contracts; (4) each RDI participant was required to open an offshore account for receipt of all commission transfers; and (5) RDI was under investigation by the SEC.

Despite the warning signs, Johnson continued to invest in RDI and began to recruit other investors, activities for which he received substantial payments from RDI. Because the RDI Trading Program never earned any legitimate income, the "commissions" and "earnings" received by Johnson were funds skimmed from later investors' payments into the Ponzi scheme.

III. DISCUSSION

Littlewood argues that the district court improperly denied him relief under Rule 60(b), and both Littlewood and Johnson contend that the district court erred by granting summary judgment.

A. Littlewood's Rule 60(b) Motion

Littlewood argues that the district court abused its discretion by not granting him Rule 60(b) relief from the default judgment. He contends that he did not receive actual notice of the summary judgment proceeding and, as a meritorious defense, that he was not a knowing participant in the alleged fraudulent transfers by other defendants. We review the district court's denial of a Rule 60(b) motion for an abuse of discretion. Seven Elves, Inc. v. Eskenazi, 635 F.2d 396, 402 (5th Cir.1981). "[T]o overturn the district court's denial . . . it is not enough that a grant of the motion might have been permissible or warranted; rather, the decision to deny the motion must have been sufficiently unwarranted as to amount to an abuse of discretion." Fackelman v. Bell, 564 F.2d 734, 736 (5th Cir.1977). However "where denial of relief precludes examination of the full merits of the cause, even a slight abuse may justify reversal." Eskenazi, 635 F.2d at 402.

Under Rule 60(b)(1), a district court may grant relief from a judgment for "mistake, inadvertence, surprise, or excusable neglect" on a motion made within one year of the judgment. FED. R.CIV.P. 60(b)(1). Pertinent to a motion for relief from a default judgment, courts are to consider: (1) the extent of prejudice to the plaintiff; (2) the culpability of the defendant's conduct; and (3) the merits of the defendant's asserted defense. Rogers v. Hartford Life & Accident Ins. Co., 167 F.3d 933, 938 (5th Cir.1999). Additional factors may be considered by the court as well, and "the decision of whether to grant relief under Rule 60(b)(1) falls within [the district court's] sound discretion." Id. at 939.

The first factor weighs in favor of Littlewood, as a grant of relief from judgment would merely require Warfield to proceed to trial on his claims against Littlewood as in any other lawsuit. Concerning the second factor, Littlewood argues that he was not culpable for the default because he did not receive notice of the motion for partial summary judgment. It is undisputed, however, that the Receiver served each of the critical summary judgment documents upon Littlewood, by regular mail, at the address provided by Littlewood's counsel in his Motion to Withdraw.1 Moreover, the clerk served the Final Judgment on Littlewood at the same address utilized by the Receiver, and that notice was received by Littlewood. With this evidence in the record, Littlewood is presumed to have received the Receiver's pleadings....

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