Warfield v. Byron

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).

12
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