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Carroll v. Stettler

United States District Court, Third Circuit

May 30, 2013



Mary A. McLaughlin, Judge.

This opinion addresses the remaining portion of a motion for summary judgment in a lawsuit seeking to recover transfers made to defendants as part of a Ponzi scheme operation. The plaintiffs are investors who incurred a net loss as a result of the fraudulent scheme. The defendants[1] who remain subject to the instant motion are investors who the plaintiffs contend received more than they invested. Plaintiffs argue that they are entitled to the return of investment profits from defendants under the Pennsylvania Uniform Fraudulent Transfer Act and the equitable doctrine of unjust enrichment. The Court grants the motion in part and denies it in part.

I. Factual and Procedural Summary[2]

The Court incorporates by reference its recitation of the facts of the underlying dispute as stated in its opinion dated April 18, 2013. Docket No. 575, available at 2013 WL 1702636 (“Insider Defendant Opinion”). To summarize, non-party Lizette Morice was the head of Gaddel Enterprises, Inc., a purported real estate investment firm. Morice represented to potential investors that they could earn a share of Gaddel profits by contributing an investment in certain properties; in reality, the properties allegedly purchased by Gaddel were fictitious, and the company continuously operated at a loss. On July 23, 2008, Morice pled guilty to seven counts of mail fraud for conducting a Ponzi scheme worth over $7 million dollars. Tr. Change of Plea Hr’g, U.S. v. Morice, No. 08-cr-132-1, at 13:10-14:14.

On May 14, 2010, plaintiffs[3] initiated this lawsuit against defendants, all of whom had received financial transfers from Gaddel sometime between April 2006 and July 2007. The lawsuit sought the recovery of certain monies transferred from Gaddel to the defendants, which would subsequently be distributed pro rata among the plaintiff class. On April 10, 2012, the plaintiffs filed the instant motion for summary judgment against twelve defendants and their entities. Three of the defendants, Albin E. Delgado, James Martin, and Troy McClain, were salaried employees of Gaddel. The remaining defendants were non-salaried investors.

After receiving some form of opposition from ten of the defendants, [4] the Court invited all interested parties to attend an oral argument on March 13, 2013. Among those in attendance at oral argument was counsel for defendant McClain and Accu-Tax; defendants Martin and Wisniewski attended pro se. Due to complications with representation from the law offices of Penberthy & Penberthy, P.C., who are the counsel of record for defendants Batdorf, DeJesus, Angeliki Diamantis, Christina Diamantis, and James Monaghan, the Court did not hear argument from those counsel.[5] Defendants Christopher and Catherine McAstocker and Delgado did not appear.

In an opinion dated April 18, 2013, the Court issued a decision on the motion as to defendants Delgado, Martin, and McClain, the salaried employees. The Court held that the plaintiffs were creditors of Gaddel under the Pennsylvania Uniform Fraudulent Transfer Act (PUFTA). Insider Defendant Opinion, 2013 WL 1702636 at *4. It also held that the transfers were made by Gaddel, through Morice, with actual fraudulent intent. Id. However, it held that there remained genuine issues of material fact regarding whether the transactions made to Martin and McClain fell under the good faith affirmative defense. It thus denied the plaintiffs’ motion as to Martin and McClain, but granted it as to Delgado. Id. at *9.

In accordance with discussion with counsel at oral argument, the Court reserved ruling on the motion against the remaining defendants and their entities, awaiting written responses from Penberthy & Penberthy.[6] The deadline for written responses having expired on March 30, 2013, the Court now proceeds with this portion of the analysis.

II. Analysis

Plaintiffs have moved for summary judgment under Fed.R.Civ.P. 56(a), [7] seeking to recover transfers related to defendants’ investment profits from Gaddel. They claim relief under the Pennsylvania Uniform Fraud Transfer Act (PUFTA) and the equitable doctrine of unjust enrichment.

A. Pennsylvania Uniform Fraudulent Transfer Act

Plaintiffs’ first claim derives from PUFTA, Pennsylvania’s version of the Uniform Fraud Transfer Act. 12 Pa. Cons. Stat. § 5101, et seq. Under PUFTA, creditors may recover monies transferred to a third party if the plaintiffs are “creditors” as defined by the statute; the transfers were made with actual fraudulent intent; and there are no viable defenses. Id. § 5104(a)(1); 5107(a)(1); 5108.

For the reasons discussed in the Insider Defendant Opinion, the Court holds that the first two requirements under PUFTA are satisfied in the instant case. First, the plaintiffs are creditors as defined by the statute. Insider Defendant Opinion, 2013 WL 1702636 at *4. Second, the transfers made by Morice and Gaddel as part of the Ponzi scheme were made with actual fraudulent intent. Id.; see also Hecht v. Malvern Preparatory Sch., 716 F.Supp.2d 395, 397 (E.D. Pa 2010).

In addition, PUFTA often requires the analysis of the “good faith” affirmative defense. Under this affirmative defense, a transaction is not recoverable if a transferee demonstrates that he took in good faith and for a “reasonably equivalent” value. 12 Pa. Cons. Stat. § 5108(a), (d).

In the Ponzi scheme context, “the general rule is that to the extent innocent investors have received payments in excess of the amounts of principal that they originally invested, those payments are avoidable as fraudulent transfers.” Donell v. Kowell, 533 F.3d 762, 770 (9th Cir. 2008). In accordance with this rule, plaintiffs seek recovery of payments only as they refer to defendants’ investment profit. Such transactions fail the affirmative defense because they could not, as a matter of law, have been taken for a reasonably equivalent value.[8]

In this case, the Court must determine whether the plaintiffs have met their burden of proving that 1) each of the defendants received a certain sum of investment profit; and 2) this sum is recoverable under PUFTA. This is a mixed question of fact and law, and, under Fed.R.Civ.P. 56(a), the Court should only grant summary judgment if the movant is entitled to judgment as a matter of law and there are no genuine disputes of material fact. Because of the common legal issues shared by a number of the defendants, the Court first resolves those legal issues. It then applies those decisions to the facts pertaining to each defendant.

1. Common Legal Issues

i. Investments Made in Others’ Names

A number of the defendants have alleged that they had given monies to other individuals to invest in those people’s names.[9] This method of investment resulted from a Gaddel policy that limited investments to $1, 000 or $2, 000 per project, causing investors to “find other individuals . . . on whose behalf to invest.” Penberthy Opp. at ¶ 8-9 (Docket No. 534). Defendants argue that because they funded those investments, these sums should be counted as part of their investment for purposes of the calculation of investment profit. They also contend that the money transfers to their accounts from Gaddel represented payment to the group, not just themselves. The Court rejects both arguments.

PUFTA is supplemented by the principles of law and equity where appropriate. 12 Pa. Cons. Stat. § 5110. Under ordinary contract principles, an investment which was taken in the name of another person (with that other person’s name on the receipt) does not, as a matter of course, count as an investment of the funder. For example, the Court considers who would have a cause of action if Gaddel had breached the transaction in question. In that situation, Gaddel would have been held liable to the named investor; it would only have been liable to the funder if the funder established that he was an intended third-party beneficiary. E.g., Restatement (Second) of Contracts § 302; Guy v. Liederbach, 501 Pa. 47, 59-60 (1983). Here, defendants have not submitted sufficient facts to lead the Court to this conclusion.

The Court’s holding is reinforced by its reasoning under the principles of equity. In the instant case, many of the named investors, who are family members of the defendants, have opted to be part of the plaintiff class.[10] In their capacity as plaintiffs who lost their “investments, ” these individuals have received monies from the class settlement.[11]Pl. Rep. at 6-7, 15. If the Court were to also credit the investments to defendants, it would be double-counting those monies in a manner that unjustly decreases the potential award to the plaintiff class. This is inequitable under PUFTA.

The Court is also not persuaded by the fact that the transfers may have reflected payments to a larger group. The statutory language of PUFTA does not support an offset of liability due to obligations to disperse ...

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