June 25, 2019

Colorado Court of Appeals: Innocent Investor May Keep Some Funds Exceeding Principal Investment in Ponzi Scheme

The Colorado Court of Appeals issued its opinion in Lewis v. Taylor on Thursday, February 9, 2017.

Steve Taylor invested $3 million in a hedge fund run by Sean Mueller, a licensed securities broker, and after about a year of investing, he withdrew all his money and received a profit of over $487,000. In 2010, the Colorado Securities Commissioner determined the hedge fund was a Ponzi scheme, and Mueller was convicted of several criminal offenses. C. Randel Lewis was appointed as receiver and tasked with collecting and distributing Mueller’s assets to the creditors and investors he defrauded through the Ponzi scheme. 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.

In the district court, both Lewis and Taylor moved 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. On appeal, a division of the Colorado Court of Appeals held the district court erred in finding the claim was timely and reversed. The court of appeals did not reach the innocent investor issue. The Colorado Supreme Court ruled that the claim was timely and remanded to the court of appeals for determination of the innocent investor issue.

On remand from the supreme court, Taylor argued 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. The court noted that CUFTA 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.” The parties agreed that Taylor was an innocent investor who withdrew his profits in good faith, but disagreed about whether he gave reasonably equivalent value for his $487,000 profits.

The court of appeals evaluated the term “reasonably equivalent value,” noting that two lines of opinions had developed among courts in jurisdictions with versions of the Uniform Fraudulent Transfers Act. The court of appeals evaluated the line of cases promoted by Lewis, particularly the leading Ninth Circuit case. The court of appeals found the Ninth Circuit’s reasoning illogical because all transfers “deplete the assets of the scheme operator for the purpose of creating the appearance of a profitable business venture.” The court similarly disagreed with other cases cited by Lewis. The Colorado Court of Appeals instead held that the value an investor gives by investing is not limited to the precise dollar amount of the principal investment, but includes the use of that money for however long it was available for investment or any other use.

The court of appeals evaluated the plain statutory language to determine whether the transfers to Taylor were voidable. The court noted that the General Assembly may wish to revisit the issue and craft a better remedy to more fairly address the circumstances while considering equitable principles embodied in doctrines such as the clean hands doctrine. The court of appeals applied the plain language to determine the district court erred in failing to account for the time value of Taylor’s principal investment in determining whether he gave reasonably equivalent value.

The court of appeals remanded for determination of the fact question of whether Taylor gave “reasonably equivalent value.” The court further directed the district court to determine based on its “reasonably equivalent value” finding whether Lewis’s and Taylor’s summary judgment motions had merit.

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