COLORADO COURT OF APPEALS
2017COA13
_______________________________________________________________________________
Court of Appeals No. 13CA0239
City and County of Denver District Court No. 12CV1699
Honorable Edward D. Bronfin, Judge
_______________________________________________________________________________
C. Randel Lewis, solely in his capacity as Receiver,
Plaintiff-Appellee and Cross-Appellant,
v.
Steve Taylor,
Defendant-Appellant and Cross-Appellee.
_______________________________________________________________________________
JUDGMENT REVERSED, ORDER VACATED,
AND CASE REMANDED WITH DIRECTIONS
Division IV
Opinion by JUDGE ASHBY
Freyre and Nieto*, JJ., concur
Announced February 9, 2017
_______________________________________________________________________________
Lindquist & Vennum PLLP, Michael T. Gilbert, John C. Smiley, Theodore J.
Hartl, Denver, Colorado, for Plaintiff-Appellee and Cross-Appellant
Podoll & Podoll, P.C., Richard B. Podoll, Robert A. Kitsmiller, Dustin J. Priebe,
Greenwood Village, Colorado, for Defendant-Appellant and Cross-Appellee
*Sitting by assignment of the Chief Justice under provisions of Colo. Const. art.
VI, § 5(3), and § 24-51-1105, C.R.S. 2016.
¶1 Following remand instructions from the supreme court, we are
again presented with an issue of first impression in Colorado. We
must now decide whether the Colorado Uniform Fraudulent
Transfer Act (CUFTA) requires an innocent investor who profited
from his investment in a Ponzi scheme to return all funds in excess
of his principal investment. We conclude that such an innocent
investor may be entitled to keep some of the funds exceeding the
amount of his principal.
I. Background
¶2 In 2006, defendant, Steve Taylor, invested three million dollars
in a hedge fund run by Sean Mueller, a licensed securities broker.
During the period of his investment, Taylor received a series of
payments from the fund. Taylor withdrew all of his money in 2007,
about one year after investing, and made a profit of over $487,000.
¶3 In 2010, the Colorado Securities Commissioner discovered
that the hedge fund was a Ponzi scheme and Mueller was convicted
of various criminal offenses. The district court appointed plaintiff,
C. Randel Lewis, as receiver to collect and distribute Mueller’s
assets to the creditors and investors he defrauded through the
1
Ponzi scheme.1 Lewis filed a claim under CUFTA seeking to void the
transfer of the over $487,000 in net profits that Taylor received
from Mueller’s fund.
¶4 Both Lewis and Taylor moved the district court for summary
judgment. Taylor argued that (1) the CUFTA claim was filed outside
the statutory time period and (2) even if the claim was timely, his
net profits were not recoverable under CUFTA because he was an
innocent investor. Lewis argued that the claim was timely filed and
that CUFTA required Taylor to return his net profits. The district
court agreed with Lewis on both issues and granted him summary
judgment.
¶5 Taylor appealed. A division of this court held that the district
court erred by ruling that the claim was timely and reversed the
district court’s grant of summary judgment on that ground. Lewis
v. Taylor, 2014 COA 27M, ¶ 8. Based on this conclusion, the
division did not address whether CUFTA required Taylor to return
his net profits.
1 A “Ponzi scheme” is a fraudulent investment scheme in which
investors are paid from the principal amounts invested by later
investors.
2
¶6 Lewis appealed the division’s decision to our supreme court.
The supreme court reversed the division’s opinion, reinstated the
district court’s ruling that the CUFTA claim was timely, and
remanded the case to this court to “consider the alternate argument
on which [Taylor] appealed the trial court’s order.” Lewis v. Taylor,
2016 CO 48, ¶ 39. We therefore now address whether CUFTA
requires Taylor to relinquish any amount of money exceeding his
principal investment in the Ponzi scheme.
II. CUFTA and Ponzi Schemes
¶7 Taylor argues that the district court erred by ruling that even
though he was an innocent investor in Mueller’s fund, CUFTA
nevertheless required him to return all of the payments from the
fund in excess of his principal investment. We review an order
granting summary judgment de novo, applying the same legal
principles as the district court. See Hamon Contractors, Inc. v.
Carter & Burgess, Inc., 229 P.3d 282, 290 (Colo. App. 2009).
¶8 Granting summary judgment is proper “when the pleadings
and supporting documentation demonstrate that no genuine issue
of material fact exists and that the moving party is entitled to
judgment as a matter of law.” Credit Serv. Co., Inc. v. Dauwe, 134
3
P.3d 444, 445 (Colo. App. 2005). We, like the district court, give the
nonmoving party the benefit of all favorable inferences from the
undisputed facts.
Id.
¶9 The CUFTA provision under which Lewis brought his claim,
section 38-8-105(1)(a), C.R.S. 2016, provides that “[a] transfer made
. . . by a debtor is fraudulent as to a creditor . . . if the debtor made
the transfer . . . . [w]ith actual intent to hinder, delay, or defraud
any creditor of the debtor.” The parties do not dispute that (1)
Mueller’s fund was Taylor’s debtor based on Taylor’s three million
dollar investment in the fund and (2) any transfers from the fund to
Taylor were fraudulent under section 38-8-105(1)(a).
¶ 10 However, CUFTA also provides that “[a] transfer . . . is not
voidable under section 38-8-105(1)(a) against a person who took in
good faith and for a reasonably equivalent value.” § 38-8-109(1),
C.R.S. 2016. The parties agree that Taylor was an innocent
investor in the fund and withdrew his principal and profits in good
faith. They also agree that Taylor gave reasonably equivalent value
for the return of his principal. But the parties disagree about
whether Taylor gave reasonably equivalent value in exchange for his
receipt of the approximately $487,000 in net profits.
4
A. District Court Misapplied the Term “Reasonably Equivalent
Value” in Section 38-8-109(1)
¶ 11 Taylor argues that the district court erred by ruling that, as a
matter of law, he did not give reasonably equivalent value for
transfers he received in amounts exceeding his principal
investment. We agree.
¶ 12 The meaning of “reasonably equivalent value” is a question of
statutory interpretation that we review de novo. See Fischbach v.
Holzberlein, 215 P.3d 407, 409 (Colo. App. 2009). If the language of
the statute is clear and unambiguous, we give effect to its plain and
ordinary meaning. See Fleury v. IntraWest Winter Park Operations
Corp.,
2014 COA 13, ¶ 7, aff’d,
2016 CO 41.
¶ 13 Whether a party has given reasonably equivalent value in
exchange for a transfer is a mixed question of law and fact that
requires a court to apply the proper definition of reasonably
equivalent value to “all the facts and circumstances surrounding
the transaction.” Schempp v. Lucre Mgmt. Grp., LLC,
18 P.3d 762,
765 (Colo. App. 2000). Market value is not “wholly synonymous”
with reasonably equivalent value, but it is an important factor for
courts to consider.
Id.
5
¶ 14 Although no Colorado appellate court has addressed this
issue, courts in other jurisdictions that have enacted similar
versions of the Uniform Fraudulent Transfer Act (UFTA) have done
so. Among the courts that have addressed this issue, two lines of
opinions have developed. One line holds, as a matter of law, that
any payout of net profits by a Ponzi scheme operator to an investor
can never be given in exchange for reasonably equivalent value.
See, e.g., Donell v. Kowell, 533 F.3d 762, 777 (9th Cir. 2008). The
other line rejects the idea that, based only on the fraudulent nature
of the Ponzi scheme, any payout in excess of an innocent investor’s
principal is necessarily not given in exchange for reasonably
equivalent value. See, e.g., In re Carrozzella & Richardson,
286 B.R.
480, 490-91 (D. Conn. 2002). Instead, these opinions require
courts to focus on what was actually given and received in the
specific transaction between the Ponzi scheme and the investor to
determine whether the investor gave reasonably equivalent value for
the net profits.
Id.
¶ 15 Lewis, like the district court, relies on opinions from the first
line of cases. We find that line of cases unpersuasive and now
explain why.
6
¶ 16 In a widely cited case on which Lewis relies, the Ninth Circuit
explained that the purpose of the reasonably equivalent value
requirement in UFTA is to ensure that the only fraudulent transfer
that is allowed to stand is one that does not deplete the assets of
the Ponzi scheme and thereby hinder the scheme’s ability to pay
back innocent investors (creditors). Donell, 533 F.3d at 777. In the
words of the Ninth Circuit, the “reasonably equivalent value”
provision exists to “identify transfers made with no rational purpose
except to avoid creditors.”
Id. Transfers that pay innocent
investors a net profit are made to avoid creditors because “[p]ayouts
of ‘profits’ made by Ponzi scheme operators are not payments of
return on investment from an actual business venture. Rather,
they are payments that deplete the assets of the scheme operator
for the purpose of creating the appearance of a profitable business
venture.”
Id.
¶ 17 But in a Ponzi scheme, all transfers to investors, whether they
constitute net profits or repayment of principal, are made with the
principal of later investors. Because all of these transfers “deplete
the assets of the scheme operator for the purpose of creating the
appearance of a profitable business venture,”
id., none is supported
7
by reasonably equivalent value as defined by the Ninth Circuit.
This is inconsistent with the Ninth Circuit’s ultimate holding that
transfers repaying principal are supported by reasonably equivalent
value but transfers of net profits are not.
¶ 18 The Ninth Circuit attempted to mitigate this flaw in its
analysis by explaining that the return of an innocent investor’s
principal is nevertheless given for reasonably equivalent value
because such transfers “are settlements against the defrauded
investor’s restitution claim.” Id. This rationale is also fraught with
contradiction. If we consider the value of a defrauded investor’s
restitution claim, should we not also consider the amount of
prejudgment interest to which the defrauded investor would be
entitled? And would this not increase the amount of any such
settlement so that the value of the settlement is greater than the
principal investment? These practical issues aside, we conclude
that it is improper in the first place, when determining what
constitutes reasonably equivalent value under CUFTA, to consider a
purely hypothetical restitution claim that an innocent investor
might have brought and succeeded on had the investor not
recovered the principal.
8
¶ 19 Other courts have reached the same conclusion as the Ninth
Circuit by a different, but, in our view, equally questionable route.
In another widely cited case on which Lewis relies, the Seventh
Circuit in Scholes v. Lehmann, 56 F.3d 750 (7th Cir. 1995),
employed an equitable and moral analysis that, we think, strays too
far from the proper and limited inquiry of whether the innocent
investor accepted the transfer for reasonably equivalent value. In
Scholes, an innocent investor invested $2.5 million in, and netted
almost $300,000 from, what was later discovered to be a Ponzi
scheme.
Id. at 755. The Seventh Circuit’s task was to decide
whether the Ponzi scheme’s transfer of the net profits to the
innocent investor violated Illinois’ version of UFTA.
Id. at 756. Like
CUFTA, the Illinois statute provided that a transfer is fraudulent
and voidable if the transferor makes it “without receiving a
reasonably equivalent value in exchange.”
Id. (quoting 740 Ill.
Comp. Stat. 160/5(a)(2) (1995)).2
2 As we understand Scholes, the Seventh Circuit held that its
reasoning applied equally to Illinois’ pre-UFTA statute and Illinois’
UFTA statute.
9
¶ 20 The Seventh Circuit began by considering the application of
the statutory provision in a moral context:
unless a fair in the sense of equal (or at least
approximately equal) exchange is insisted
upon, loopholes are opened in the fraudulent
conveyance statute that can only be described
as immoral — a relevant consideration, when
we consider the equitable origins of the
concept of fraud. We said that [innocent
investor’s] profit was supported by
consideration. But what was the source of the
profit? A theft by [the Ponzi scheme operator]
from other investors. What then is [the
innocent investor’s] moral claim to keep his
profit? None, even if the intent in paying him
his profit was not fraudulent.
Id. at 757. Purportedly returning to the statute it was applying, the
Seventh Circuit held that the innocent investor was
entitled to his profit only if the payment of that
profit to him, which reduced the net assets of
the estate now administered by the receiver,
was offset by an equivalent benefit to the
estate. It was not. A profit is not offset by
anything; it is the residuum of income that
remains when costs are netted against
revenues. The paying out of profits to [the
innocent investor was] not offset by further
investments by him conferred no benefit on the
corporations but merely depleted their
resources faster.
10
Id. (citation omitted). With that, the Seventh Circuit held that the
innocent investor could keep his principal but not the net profit.
Id.
at 757-58.
¶ 21 A significant problem with this analysis is that it ignores the
fact that the value that an investor gives by investing is not limited
to the precise dollar amount of the principal investment. The value
also includes the use of that money for however long it was
available for investment or any other use. Thus, the Seventh
Circuit’s analysis “ignore[s] the universally accepted fundamental
commercial principal [sic] that, when you loan an entity money for a
period of time in good faith, you have given value.” Carrozzella &
Richardson,
286 B.R. at 489.
¶ 22 We recognize that in the context of a Ponzi scheme, the
investors’ principal is not invested as promised, and the time value
of an innocent investor’s principal does not increase the scheme’s
net worth. But reasonably equivalent value “include[s] both direct
and indirect benefits to the transferor, even if the benefit does not
increase the transferor’s net worth.” Leverage Leasing Co. v. Smith,
143 P.3d 1164, 1167 (Colo. App. 2006). Regardless of whether a
Ponzi scheme uses an innocent investor’s money for proper or
11
fraudulent purposes, it nevertheless receives the benefit of the use
of that money for a period of time. And the use of that money for a
period of time has value. See Carrozzella & Richardson, 286 B.R. at
489.
¶ 23 In addition to the problems with Donell and Scholes identified
above, we note one more which those opinions have failed to
resolve. Under Donell, Scholes, and opinions like them, payments
from a Ponzi scheme to trade creditors like landlords and utility
companies for legitimately provided services would be subject to
avoidance if those trade creditors profited at all from the
transaction. These payments, just like the payment of net profits to
innocent investors, are funded by the principal invested by other
investors. This, coupled with the fact that they are made to
perpetuate the Ponzi scheme, means that they are made with
“actual intent to hinder, delay, or defraud any creditor” of the
scheme and are therefore fraudulent. § 38-8-105(1)(a). And even if
the trade creditors take the payments in good faith, under Donell
and Scholes, any amount of that payment in excess of the utility
company’s or landlord’s costs would not be for reasonably
equivalent value under section 38-8-109(1). See In re Unified
12
Commercial Capital, Inc., 260 B.R. 343, 352 (Bankr. W.D.N.Y.
2001); see also Carrozzella & Richardson,
286 B.R. at 490 (citing
Unified Commercial Capital,
260 B.R. at 352).
¶ 24 Although we find the reasoning in the cases cited by Lewis
flawed and unpersuasive, we nevertheless recognize that the courts
that authored them, and the district court here, were motivated by
the laudable goal of attempting to mitigate the harm to defrauded
creditors in a fair and equitable manner. But when applying a
provision in a statute, it is our job to apply the plain and ordinary
meaning of the words in the statute even when doing so may
conflict with our own view of what is the most fair or equitable
result. We suspect that the flaws that we perceive in the analysis of
the opinions discussed above emanate from an attempt to apply
fraudulent conveyance statutes to circumstances for which they
were not legislatively designed. As the court stated in Unified
Commercial Capital,
260 B.R. at 350,
[b]y forcing the square peg facts of a “Ponzi”
scheme into the round holes of the fraudulent
conveyance statutes in order to accomplish a
further reallocation and redistribution to
implement a policy of equality of distribution
in the name of equity, I believe that many
courts have done a substantial injustice to
13
those statues and have made policy decisions
that should be made by Congress.
¶ 25 We are not the first court to have disagreed with the reasoning
of cases like Donell and Scholes. The Carrozzella & Richardson
court, among others, did so too, and identified the fundamental flaw
in the reasoning of those cases: the improper focus on the overall
nature and propriety of the transferor’s business rather than, as the
statute requires, whether the transferor received reasonably
equivalent value for the transfer. See Carrozzella & Richardson,
286 B.R. at 488-89 (“The statutes and case law do not call for the
court to assess the impact of an alleged fraudulent transfer in a
debtor’s overall business.” (quoting In re Churchill Mortg. Inv. Corp.,
256 B.R. 664, 680 (Bankr. S.D.N.Y. 2000))). As the Carrozzella &
Richardson court explained, the reasonably equivalent value
provision in UFTA, which is identical to that in CUFTA, requires “an
evaluation of the specific consideration exchanged by the
[transferor] and the transferee in the specific transaction which the
[receiver] seeks to avoid, and if the transfer is equivalent in value, it
is not subject to avoidance under the law.”
Id. at 489 (quoting
Churchill,
256 B.R. at 680). We agree with the Carrozzella &
14
Richardson court that we cannot read a Ponzi scheme exception
into CUFTA that would allow us to examine the propriety of the
transferor’s business when determining whether a transferee gave
reasonably equivalent value for a transfer.
¶ 26 Ultimately, no matter how tempting, we may not look beyond
the plain language of the statute to decide which transfers from a
Ponzi scheme are voidable and which are not. The General
Assembly may wish to revisit this issue and craft a different statute
that it determines more fairly addresses these circumstances.
Perhaps it should, especially given that courts have engaged in
such unconvincing analytical gymnastics to effect equitable
remedies by way of fraudulent transfer statutes. If it does craft a
new statute, the General Assembly may wish to consider the
arguments advanced by cases like Scholes, or equitable principles
embodied in doctrines such as the clean hands doctrine. See
Premier Farm Credit, PCA v. W-Cattle, LLC, 155 P.3d 504, 519 (Colo.
App. 2006) (“[A] party engaging in improper or fraudulent conduct
relating in some significant way to the subject matter of the cause
of action may be ineligible for equitable relief.”). But it is not our
place to apply such equitable principles in circumstances where, as
15
here, there is an unambiguous statute to apply. Instead, we must
apply the plain language that the General Assembly chose in
enacting CUFTA. And section 38-8-109(1), like the rest of CUFTA,
addresses the propriety of a transfer, not the propriety of the
transferor’s overall business. Accordingly, any evaluation of what
constitutes reasonably equivalent value in this case must address
what was actually exchanged, not how the hedge fund fraudulently
used whatever it received in the exchange. This evaluation cannot
ignore the fact that there is value in the use of money for a period of
time.
¶ 27 We therefore conclude that the district court erred by not
accounting for the time value of Taylor’s principal investment when
determining whether he gave reasonably equivalent value under
section 38-8-109(1) for transfers he received from Mueller’s fund.
B. Remand is Necessary
¶ 28 We would normally prefer to give the trial court more specific
guidance on remand. And, under different circumstances, we might
have been able to properly apply section 38-8-109(1) ourselves to
determine which transfers are voidable and which are not. But
whether “reasonably equivalent value” has been given is a question
16
of fact. See In re Zeigler, 320 B.R. 362, 374 (Bankr. N.D. Ill. 2005).
And because the district court did not make findings about any
individual transfers, we cannot do so and must remand for the
district court to make additional findings.
¶ 29 Section 38-8-109(1) is unambiguous in describing
circumstances under which “a transfer” is voidable. The plain and
ordinary meaning of this section therefore requires courts to decide
whether individual transfers are voidable. See Fleury, ¶ 7 (when
interpreting a statute that is clear and unambiguous, we give effect
to its plain and ordinary meaning).
¶ 30 The district court’s findings of undisputed material facts
suggested that there were individual transfers, but did not identify
any of them. The district court found that “[b]etween September 1,
2006 and April 19, 2007, a total of $3,487,305.29 was paid out to
Mr. Taylor from the Mueller Funds (the Ponzi scheme). This
represents a return of all $3 million in principal he invested, plus
an additional profit of $487,305.29 (‘Net Profit’).” We presume from
this finding that (1) Taylor received a series of transfers from
Mueller’s fund and (2) the district court aggregated the value of
these unidentified individual transfers and then determined that
17
the portion of the aggregate Taylor received that exceeded his
principal investment was not, as a matter of law, supported by
reasonably equivalent value.
¶ 31 This analysis violates the plain language of section 38-8-109(1)
requiring courts to evaluate whether “[a] transfer” is voidable, not
whether portions of the aggregate of several transfers are voidable.
And because the district court’s factual findings do not identify the
individual transfers, we are unable apply section 38-8-109(1)
ourselves.
¶ 32 We must therefore remand the case to the district court to
make additional findings about the individual transfers Taylor
received from Mueller’s fund and to consider whether Taylor
received the transfers for reasonably equivalent value.
III. Other Issues
¶ 33 Because we reverse the district court’s order granting
summary judgment, we vacate the court’s order awarding costs and
interest to Lewis. But because the supreme court’s remand order
directed us only to “consider the alternate argument on which
[Taylor] appealed the trial court’s order,” Lewis, 2016 CO 48, ¶ 39,
we do not address Taylor’s argument that the district court erred by
18
dismissing his counterclaim for rescission of the investment
contract with Mueller. We nevertheless note that even if the
supreme court’s remand order allowed us to consider this
argument, we could not because the investment contract is not part
of the record on appeal.
IV. Conclusion
¶ 34 The district court’s order granting Lewis summary judgment is
reversed and the case is remanded to the district court with
directions to determine whether Taylor received any individual
transfers for reasonably equivalent value as that term is explained
in this opinion. Based on that determination, the district court
should rule on both Taylor’s and Lewis’ motions for summary
judgment and conduct further proceedings as it deems appropriate.
JUDGE FREYRE and JUDGE NIETO concur.
19
