United States Court of Appeals
Fifth Circuit
F I L E D
UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT January 17, 2006
_______________________ Charles R. Fulbruge III
Clerk
No. 04-10796
_______________________
LAWRENCE J. WARFIELD, as the Receiver for
Resource Development International, et al.,
Plaintiff-Appellee,
versus
BOB L. BYRON; et al.,
Defendants;
CHARLES LITTLEWOOD,
Defendant-Appellant.
*****************************************************************
_______________________
No. 04-11041
_______________________
LAWRENCE J. WARFIELD, as the Receiver
for Resource Development International, et al.,
Plaintiff-Appellee,
versus
BOB L. BYRON; et al.,
Defendants;
LARRY P. JOHNSON,
Defendant-Appellant.
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
2
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).
3
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
4
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,
5
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
6
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
7
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. See Beck v.
Somerset Techs., Inc., 882 F.2d 993, 996 (5th Cir. 1989) (“Proof
that a letter properly directed was placed in a U.S. Post office
mail receptacle creates a presumption that it reached its
destination in the usual time and was actually received by the
person to whom it was addressed.”). Apart from his self-serving
affidavit, Littlewood presented no evidence to rebut this
presumption. Therefore, the second factor favors the Receiver.
Littlewood’s attempt to raise a meritorious defense is
also unavailing. That he was merely an investor in the RDI scheme
and not a knowing participant in any fraudulent conduct are not
relevant to his liability under UFTA. See Part B, infra. Further,
nothing in Littlewood’s affidavit supporting his Rule 60(b) motion
1
These documents were: (1) the Receiver’s Notice of Motion for Partial
Summary Judgment; (2) the Receiver’s Joint Submission Motion for Partial Summary
Judgment; and (3) the Receiver’s Notice of Default Regarding Receiver’s Motion
for Partial Summary Judgment.
8
negated that RDI operated as a fraudulent Ponzi scheme from which
Littlewood received profits. Littlewood also argues that he
invested more in the RDI program and received less than the amounts
the Receiver calculated, but the Receiver’s documentary evidence
and testimony contradict his assertions. See Lawrence, 276 F.3d at
197.
Offering additional factors to persuade, Littlewood
argues that he acted in good faith in the litigation by
(1) continuing to participate in discovery after his initial
counsel withdrew, (2) communicating with opposing counsel in an
effort to resolve the case amicably, (3) retaining counsel in
Texas shortly after he realized that the district court had entered
judgment against him, and (4) instructing his new counsel to file
a Rule 60(b) motion within three weeks of the entry of the final
judgment. This argument, however, hurts his cause as much as it
helps him. The record indicates that the Receiver’s counsel
offered settlement terms to Littlewood and explicitly warned him
that if the settlement offer was not accepted, the Receiver would
obtain a judgment for the full amount of Littlewood’s liability.
Hence, even if Littlewood failed to receive the Receiver’s Motion
for Partial Summary Judgment, Littlewood did nothing to monitor the
status of the claims against him. His explanations do not justify
his failure to attend to this lawsuit. Smith v. Alumax Extrusions,
Inc., 868 F.2d 1469, 1471-72 (5th Cir. 1989) (“[T]he fact that a
litigant is personally uninformed as to the state of the matters
9
before the court pertaining to his case is not sufficient to
constitute the excusable neglect warranting relief from summary
judgment contemplated by Rule 60(b).”).
For these reasons, and because the district court’s
denial of Littlewood’s Rule 60(b) motion did not preclude
examination of the merits of the case, the court did not abuse its
discretion.
B. Summary Judgment
Littlewood and Johnson argue that the district court
erred by granting summary judgment by default.2 Summary judgment
is proper when “the pleadings, depositions, answers to interroga-
tories, and admissions on file, together with the affidavits, if
any, show that there is no genuine issue as to any material fact
and that the moving party is entitled to a judgment as a matter of
law.” FED. R. CIV. P. 56(c). The burden is on the moving party to
show that “there is an absence of evidence to support the nonmoving
party's case.” Freeman v. Tex. Dep’t of Crim. Justice, 369 F.3d
854, 860 (5th Cir. 2004) (citing Celotex Corp. v. Catrett, 477 U.S.
317, 325, 106 S. Ct. 2548, 2554 (1986)). Once the moving party
meets its initial burden, the nonmoving party “must set forth
2
Appellants argue that the district court rendered a default judgment
based solely on the pleadings. The record demonstrates that the court granted
summary judgment based on evidence, and not just on the pleadings, however.
Although the order granting the Receiver’s motion for partial summary judgment
stated that the court had reviewed the pleadings to determine whether the
Appellants raised genuine issues of material fact, the Order also referenced the
Receiver’s motion, which was supported by excerpts from the Appellants’
depositions and discovery responses, as well as the Receiver’s sworn declaration.
10
specific facts showing that there is a genuine issue for trial.”
FED. R. CIV. P. 56(e). The nonmoving party, however, “cannot
satisfy this burden with conclusory allegations, unsubstantiated
assertions, or only a scintilla of evidence.” Freeman, 369 F.3d at
860 (citations omitted). We review the district court’s granting
of summary judgment de novo, applying the same standard as the
district court. United States v. Lawrence, 276 F.3d 193, 195 (5th
Cir. 2001).
Littlewood and Johnson argue, and the Receiver concedes,
that Washington state’s law concerning the UFTA, and not that of
Texas, should be applied in this case. Appellants further rely on
a Washington state fraudulent transfer case holding that a money
judgment may only be awarded against a transferee if the transferee
knowingly accepted the property with an intent to assist the debtor
in evading the creditor and place the transferred assets beyond the
creditor’s reach. Park Hill Corp. v. Sharp, 803 P.2d 326, 328
(Wash. Ct. App. 1991). They overlook that in Eagle Pacific Ins.
Co. v. Christensen Motor Yacht Corp., 934 P.2d 715 (Wash. Ct. App.
1997), the court rejected Park Hill and decided that the plain
language of the UFTA permits entry of judgment even without proof
that the transferee knowingly accepted property and intended to
assist the debtor in evading the creditor. See id. at 720.
In light of these split authorities, and because the
Supreme Court of Washington has not interpreted the provision of
the UFTA at issue in the instant case, we must make an “Erie guess”
11
as to how Washington would interpret the provision at issue. Mayo
v. Hartford Life Ins. Co., 354 F.3d 400, 406 (5th Cir. 2004).
Eagle Pacific, we “guess,” is more consistent with the plain
reading of the text of the UFTA. Additionally, Eagle Pacific’s
interpretation is consistent with how Illinois’s version of the
UFTA, which mirrors Washington’s version, has been interpreted.
See Scholes v. Lehman, 56 F.3d 750, 757 (7th Cir. 1995)
(interpreting Illinois’s version of the UFTA). Further, this
provision of the UFTA (including the Texas version of the UFTA
relied on by the district court) is “virtually identical” to the
corresponding provision of the Bankruptcy Code, 11 U.S.C. § 548,3
and cases interpreting that statute are consistent with the
interpretation arrived at in Eagle Pacific. See Ramirez Rodriguez
v. Dunson (In re Ramirez Rodriguez), 209 B.R. 424 (Bankr. S.D. Tex.
1997); Cuthill v. Greenmark, LLC (In re World Vision Entm’t. Inc.),
275 B.R. 641, 658 (Bankr. M.D. Fla. 2002); In re Carrozzella &
Richardson, 286 B.R. 480, 485-86 (Bankr. D. Conn. 2002). Thus, the
Park Hill interpretation of Washington’s version of the UFTA is an
outlier on which Appellants may not rely.
To recover the transfers from RDI to Littlewood and
Johnson, the Receiver was required to demonstrate that Littlewood
and Johnson received transfers from RDI that were made with actual
3
See Scholes, 56 F.3d at 756; In re Agric. Research & Tech. Group,
Inc., 916 F.2d 528, 535-36 (9th Cir. 1990).
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intent to defraud. WASH. REV. CODE § 19.40.041(a)(1).4 The Receiver
satisfied his burden with evidence of Appellants’ receipts from RDI
and evidence that RDI was a Ponzi scheme, which is, as a matter of
law, insolvent from its inception. Cunningham v. Brown, 265 U.S.
1, 7-8, 44 S. Ct. 424, 428 (1924). The Receiver’s proof that RDI
operated as a Ponzi scheme established the fraudulent intent behind
transfers made by RDI. See Scholes, 56 F.3d at 757. Littlewood and
Johnson could then preclude recovery by the Receiver by proving
that they had received the transfers in good faith and in exchange
for reasonably equivalent value. See § 19.40.081.5 Appellants
contend that because they were not knowing participants in the
Ponzi scheme, they cannot be held liable under the Washington
version of the UFTA. As noted above, however, the transferees’
knowing participation is irrelevant under the statute. See Eagle
4
WASH. REV. CODE § 19.40.041(a)(1):
(a) A transfer made or obligation incurred by a debtor is
fraudulent as to a creditor, whether the creditor's claim
arose before or after the transfer was made or the obligation
was incurred, if the debtor made the transfer or incurred the
obligation:
(1) With actual intent to hinder, delay, or defraud any
creditor of the debtor.
5
WASH. REV. CODE § 19.40.081:
(a) A transfer or obligation is not voidable under RCW
19.40.041(a)(1) against a person who took in good faith and
for a reasonably equivalent value or against any subsequent
transferee or obligee.
(b) Except as otherwise provided in this section, to the extent a
transfer is voidable in an action by a creditor under RCW
19.40.071(a)(1), the creditor may recover judgment for the
value of the asset transferred, as adjusted under subsection
(c) of this section, or the amount necessary to satisfy the
creditor's claim, whichever is less. The judgment may be
entered against:
(1) The first transferee of the asset or the person
for whose benefit the transfer was made.
13
Pacific, 934 P.2d at 720; Scholes, 56 F.3d at 759-60. The
Appellants’ individual defenses to summary judgment can be analyzed
against this background.
Littlewood asserts that the Receiver’s evidence was not
based on personal knowledge, was both hearsay and incompetent, and
therefore was inadmissible for summary judgment purposes under
Federal Rule of Civil Procedure 56. Littlewood’s assertions are
without merit. First, the Receiver qualified as RDI’s record
custodian. See United States v. Jones, 554 F.2d 251, 252 (5th Cir.
1977). Second, he spent thousands of hours investigating RDI’s
banking transactions and establishing that RDI was a Ponzi scheme.
The Receiver testified that he subpoenaed bank records from more
than one hundred seventy-five financial institutions and reviewed
over thirty-two thousand banking transactions to unravel the Ponzi
scheme. Third, the Receiver’s sworn declaration firmly established
that specific amounts of Ponzi scheme assets were transferred to
Littlewood and consisted of other investors’ money rather than
legitimate earnings. Finally, Littlewood fails to specify any
statement or document attached to the Receiver’s Declaration that
was inadmissible.6
While the Receiver’s proof satisfied his burden under the
UFTA to recover the transfers, see WASH. REV. CODE § 19.40.041(a)(1),
6
Littlewood also challenges that he received net transfers from RDI
of $118,655, the amount expressed in the judgment. The Receiver’s conservative
and well-supported conclusion took into account Littlewood’s only viable
complaint. No genuine fact issue exists over the amount of transfer.
14
Littlewood failed to supply any competent evidence that he received
the transfers in exchange for reasonably equivalent value. See
§ 19.40.081.7 The district court did not err in granting summary
judgment for the Receiver.
Johnson first argues, conclusorily and without offering
proof or challenging the Receiver’s evidence, that RDI was not
operated as a Ponzi scheme. Conclusory allegations and unsubstan-
tiated assertions, however, are not competent summary judgment
evidence. Freeman, 369 F.3d at 860 (citations omitted). Moreover,
contrary to his argument, Johnson sought a deduction on his 2002
federal tax return related to casualty and theft. The deduction
requires the taxpayer to aver that his loss was the result of
“swindling, false pretenses, [or] any other form of guile.” See
Edwards v. Bromberg, 232 F.2d 107, 109-110 (5th Cir. 1956).
Johnson’s tax return constitutes a significant, albeit not
definitive, admission that RDI was operated in a fraudulent
manner.8
Johnson also urges that, even if the Receiver satisfied
his burden, recovery should be precluded because Johnson received
the transfers from RDI in good faith and in exchange for reasonably
equivalent value. See WASH. REV. CODE § 19.40.081. There is a strong
7
We assume arguendo that Littlewood’s affidavit, attached to his Rule
60(b) motion, created a sufficient issue on his good faith.
8
Johnson’s disagreement with the Receiver over the net amount of RDI
funds he received is, like Littlefield’s, unavailing and conclusory against the
Receiver’s conservative estimate.
15
likelihood that Johnson cannot establish good faith under an
objective standard. In re Agric. Research & Tech. Group, Inc., 916
F.2d at 535-36 (in context of the UFTA, court examines what
transferee objectively knew or should have known in questions of
good faith); In re Sherman, 67 F.3d 1348, 1355 (8th Cir. 1995) (in
context of § 548 of the Bankruptcy Code, good faith is determined
by looking at what the transferee “objectively knew or should have
known instead of examining the transferee’s actual knowledge from
a subjective standpoint”). Johnson’s failure to inquire about RDI
more closely, in light of the abundant suspicious information he
possessed about the people, the scheme, and the previous schemes,
raises serious questions about his good faith defense.
We need not draw a conclusion on good faith, however, as
his defense would still fail because he did not receive the
transfers from RDI in exchange for reasonably equivalent value.
Johnson relies on his broker services to RDI as reasonably
equivalent value for the transfers he received. The primary
consideration in analyzing the exchange of value for any transfer
is the degree to which the transferor’s net worth is preserved.
See Butler Aviation Int’l v. Whyte, 6 F.3d 1119, 1127 (5th Cir.
1993). It takes cheek to contend that in exchange for the payments
he received, the RDI Ponzi scheme benefitted from his efforts to
extend the fraud by securing new investments. See In re Ramirez
Rodriguez, 209 B.R. at 434 (stating that “as a matter of law, the
Defendant gave no value to the debtors [Ponzi scheme operators] for
16
the commissions attributable to investments made by others pursuant
to the verbal agreement with [the debtors]”); see also Randy v.
Edison Worldwide Capital (In re Randy), 189 B.R. 425, 438-39
(Bankr. N.D. Ill. 1995) (as illegal services premised on illegal
contracts, broker services provided in furtherance of a Ponzi
scheme do not provide reasonably equivalent value); Dicello v.
Jenkins (In re Int’l Loan Network, Inc.), 160 B.R. 1, 16 (Bankr.
D.D.C. 1993)(investors who talked up Ponzi scheme, even if they had
a contract, conferred no value since enforcing an illegal contract
exacerbates harm to defrauded creditors). This argument is
unacceptable.
The evidence in this case demonstrated that RDI did not
receive reasonably equivalent value from Johnson, and Johnson
failed to raise any genuine issue of material fact demonstrating
otherwise. Accordingly, the district court did not err in granting
summary judgment for the Receiver.
V. CONCLUSION
For the reasons discussed above, we AFFIRM the judgments
as to both Johnson and Littlewood; we VACATE the order declaring
nondischargeability of the judgments in bankruptcy.
17