Klein v. King & King & Jones, 571 F. App'x 702

Background

Winsome Investment Trust operated as a Ponzi scheme from at least 2005; investor funds were used to pay third parties.
Enrique Baca retained Atlanta law firm King & King & Jones, P.C. (KKJ) in 2006; Winsome wired two $12,500 payments (total $25,000) from its account to KKJ to pay KKJ’s fee.
Baca’s criminal charges were dropped in 2007; the record does not show any direct benefit to Winsome from the legal services.
In January 2011 a receiver (R. Wayne Klein) was appointed for Winsome; the receiver sued KKJ to recover the $25,000 as fraudulent transfers or unjust enrichment.
The district court granted summary judgment for the receiver, finding the transfers both actually and constructively fraudulent under Utah’s UFTA and holding KKJ did not provide reasonably equivalent value to Winsome.
The Tenth Circuit affirmed, holding KKJ was an initial transferee, not entitled to UFTA defenses, and that Winsome intended to incur debts beyond its ability to pay.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Were the transfers actually fraudulent under Utah UFTA?	Receiver: Winsome made transfers with actual intent to hinder, delay, or defraud creditors.	KKJ conceded Winsome’s intent but argued it took in good faith for reasonably equivalent value.	Yes; transfers were actually fraudulent; KKJ conceded intent but failed the value defense.
Did KKJ provide "reasonably equivalent value" to Winsome?	Receiver: KKJ’s services benefitted Baca, not Winsome, so no value to the debtor.	KKJ: Provided legal services in good faith and thus should qualify for the value defense.	No; payment solely benefiting a third party does not give reasonably equivalent value to the debtor.
Is KKJ protected as a "person who took in good faith and for reasonably equivalent value" or as a "subsequent transferee" under UFTA § 25-6-9?	KKJ: Claiming good-faith/value defense and that it is a subsequent transferee.	Receiver: KKJ was the direct/initial transferee and not entitled to subsequent-transferee protections.	KKJ acted in good faith but was not entitled to the value defense; it was the initial transferee, not a subsequent transferee.
Were the transfers constructively fraudulent under Utah UFTA?	Receiver: Winsome received no reasonably equivalent value and, as a Ponzi scheme, intended or should have foreseen insolvency.	KKJ: Argued receipt in good faith and for services undermines constructive-fraud claim.	Yes; transfers lacked reasonably equivalent value and Winsome’s Ponzi operation satisfies the insolvency/debt condition.

Key Cases Cited

S.E.C. v. Thompson, 732 F.3d 1151 (10th Cir.) (standard of review for summary judgment)
Janvey v. Democratic Senatorial Campaign Comm., Inc., 712 F.3d 185 (5th Cir.) (federal receiver may recover transfers under state UFTA for Ponzi schemes)
S.E.C. v. Res. Dev. Int’l, LLC, 487 F.3d 295 (5th Cir.) (payments solely for third-party benefit do not constitute reasonably equivalent value)
In re Bargfrede, 117 F.3d 1078 (8th Cir.) (interpretation of "reasonably equivalent value" under § 548 persuasive for UFTA)
Dahnken, Inc. v. Wilmarth, 726 P.2d 420 (Utah) (satisfaction of obligation owed to transferee by a third party is not fair consideration)
Bailey v. Big Sky Motors, Ltd. (In re Ogden), 314 F.3d 1190 (10th Cir.) (initial-transferee concept under bankruptcy law)
Rupp v. Markgraf, 95 F.3d 936 (10th Cir.) (entity for whose benefit transfer was made lacks dominion/control and thus is not initial transferee)