Klein v. RoeKlein v. Roe
(D.C. No. 2:19-CV-00719-DN)
(D.C. No. 2:19-CV-00779-DN)
(D.C. No. 2:19-CV-00705-DN)
(D.C. No. 2:19-CV-00704-DN)
(D.C. No. 2:19-CV-00761-DN)
Steven R. Paul (Denver C. Snuffer, Jr. with him on the briefs), Nelson, Snuffer, Dahle & Poulsen, Sandy, Utah, for Defendants-Appellants.
Jeffery A. Balls, Parr Brown Gee & Loveless, P.C., Salt Lake City, Utah, on the brief for Plaintiff-Appellee.
Before HOLMES, Chief Judge, BACHARACH, and PHILLIPS, Circuit Judges.
HOLMES, Chief Judge.
Appellants,1 salespersons who sold solar lenses to investors on behalf of RaPower-3, LLC (“RaPower“), International Automated Systems, Inc., (“IAS“), LTB1, LLC, (“LTB1“), their subsidiaries and affiliates (collectively with RaPower, IAS, and LTB1, the “Receivership Entities“),2 Neldon Johnson, and R. Gregory Shepard (collectively with Receivership Entities, the “Receivership Defendants“), appeal from the district court‘s grant of summary judgment to R. Wayne Klein, the
Thereafter, the Receiver initiated lawsuits against individuals and entities—including Appellants—that were paid commissions for selling the Receivership Defendants’ solar lenses to investors. Among other claims, the Receiver brought claims for avoidance of a fraudulent transfer under the Uniform Voidable Transactions Act (“UVTA“), offer and sale of unregistered securities, and offer and sale of securities by an unregistered broker-dealer or agent. The district court granted summary judgment to Mr. Klein on these claims.
Appellants now appeal the district court‘s decision. Among other things, they assert that the district court erred in granting summary judgment on the Receiver‘s UVTA claim, as Appellants allegedly gave reasonably equivalent value for the commissions that they received. They also claim that the district court improperly ordered disgorgement of the commissions paid to Appellants. Having carefully considered all of Appellants’ arguments for relief, and exercising jurisdiction under
A
These appeals arise from actions ancillary to United States v. RaPower-3, LLC, 343 F. Supp. 3d 1115 (D. Utah 2018). In that case, Mr. Johnson claimed to have invented a solar energy technology, which involved placing arrays of solar lenses on towers. See United States v. RaPower-3, LLC, 960 F.3d 1240, 1244 (10th Cir. 2020). To generate income for the project, Mr. Johnson sold the solar lenses to prospective investors. See id. Specifically, through a multi-level marketing model, “buyers would purchase lenses from one of Mr. Johnson‘s entities, IAS or RaPower-3 . . . for a down payment of about one-third of the purchase price.” Id. In return, the Receivership Defendants promised investors substantial returns and tax benefits.
When customers purchased lenses, they also signed operations and maintenance agreements with LTB1, with LTB1 agreeing to operate and maintain the customers’ lenses to produce revenue. See id. LTB1 was supposed to make quarterly payments to the lens purchasers, representing a portion of the revenues earned from the electricity generated from the solar lenses.
No customer ever leased her solar lens to an entity other than LTB1. See Aplts.’ App., Vol. VII, at 5 (District Ct. Mem. Decision and Order Granting in Part Receiver‘s Mot. for Summ. J., filed Apr. 16, 2021). Furthermore, customers never took direct physical possession of their lenses. See id. The Receivership Defendants did not even track which lenses belonged to which customer; thus, there was no means for a customer to know which specific lens she owned.
Accordingly, the government brought suit against Receivership Defendants, alleging that they were operating a fraudulent and unlawful solar energy tax scheme by encouraging investors to take federal tax deductions for their purchase of defunct solar technology. See id. at 1243. After a bench trial, the district court enjoined the Receivership Entities from continuing to promote the scheme and ordered disgorgement of their gross receipts. See id. The court further ordered the entities to turn over their assets and business operations to Mr. Klein—who now serves as the Receiver of the Receivership Entities. See id. at 1254.
B
In his role as Receiver, Mr. Klein initiated lawsuits against individuals and entities that were paid commissions for selling the Receivership Defendants’ solar lenses to investors. Of relevance here, Appellants acted as salespersons for the Receivership Defendants, selling solar lenses to prospective investors. In exchange
The Receiver alleged that Appellants were not licensed under state or federal securities laws to sell securities, and that the lens purchase program was not registered—as it should have been—with the U.S. Securities and Exchange Commission or the Utah Division of Securities as a security. As such, the Receiver sought to recover the commissions that Receivership Defendants paid to Appellants, as those commissions were allegedly obtained pursuant to illegal contracts and in violation of securities laws.
The Receiver brought:
three (3) claims for Avoidance of a Fraudulent Transfer under
Utah Code Ann. § 25-6-5(1) ,§ 25-6-8 ,§ 25-6-202(1)(a) and§ 25-6-303 (First, Second and Third Claims); a claim for unjust enrichment (Fourth Claim); a claim for Fraud in Offer and Sale of Securities (Fifth Claim); Offer and Sale of Unregistered Securities (Sixth Claim); and Offer and Sale of Securities by an Unregistered Broker-Dealer Agent (Seventh Claim).
Aplts.’ Opening Br. at 9.3
After discovery, the Receiver filed a motion for summary judgment on his First, Second, Third, Sixth, and Seventh claims against Appellants. The district court granted summary judgment in favor of the Receiver and against all Appellants on the
II
Appellants appeal from the district court‘s judgment, first arguing that the Receiver “failed to allege sufficient material facts to establish the essential elements of a fraudulent conveyance.” Aplts.’ Opening Br. at 21. Alternatively, Appellants contend that even if the transfers were fraudulent, Appellants met the requirements to invoke the good faith defense—as they took the transfers in good faith and for reasonably equivalent value. See id. at 26. As such, Appellants claim that the transfers were not voidable under the UVTA. Second, Appellants assert that the district court improperly ordered disgorgement of the commissions that they were paid for selling the solar lenses.
The Receiver first argues that “Appellants have not identified any disputed issues of material fact that would preclude summary judgment in favor of the Receiver” on his UVTA claim. Aplee.‘s Resp. Br. at 14. The Receiver further contends that Appellants cannot rely on the good faith defense, as they “did not provide reasonably equivalent value to the Receivership Entities in exchange for the
After rejecting Appellants’ threshold standing arguments, we conclude that the district court (1) properly granted summary judgment to the Receiver on his UVTA claim, and (2) did not abuse its discretion in ordering disgorgement of the commissions paid to Appellants, as the commissions were obtained in violation of state and federal securities laws.4 Accordingly, we uphold the district court‘s judgment.
III
“We review the district court‘s summary judgment decision de novo, applying the same standards as the district court.” Punt v. Kelly Servs., 862 F.3d 1040, 1046 (10th Cir. 2017). “Summary judgment is proper if, viewing the evidence in the light most favorable to the non-moving party, there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Peterson v. Martinez, 707 F.3d 1197, 1207 (10th Cir. 2013). However, the “mere existence of
To determine whether a “genuine issue” as to a material fact exists, we consider “whether the evidence presents a sufficient disagreement to require submission to a jury or whether it is so one-sided that one party must prevail as a matter of law.” Anderson, 477 U.S. at 251–52; accord SEC v. GenAudio Inc., 32 F.4th 902, 920 (10th Cir. 2022). Furthermore, “[m]ere allegations unsupported by further evidence . . . are insufficient to survive a motion for summary judgment.” Potts v. Davis Cnty., 551 F.3d 1188, 1192 (10th Cir. 2009) (quoting Baca v. Sklar, 398 F.3d 1210, 1216 (10th Cir. 2005)); accord James v. Wadas, 724 F.3d 1312, 1319–20 (10th Cir. 2013).
A
Appellants first challenge the Receiver‘s standing to sue under the UVTA. See Aplts.’ Opening Br. at 21–25. Specifically, Appellants contend that, under the UVTA, the Receiver “had to establish that a creditor had a claim before or after the debtor made the transfer with the actual intent to hinder, delay or defraud any creditor of the debtor.” Id. at 22. Here, however, Appellants claim that the Receiver “failed to” identify an appropriate creditor in this case. Id. More specifically, Appellants argue that the UVTA does not empower the Receiver (i.e., the named creditor) to bring claims on behalf of the Receivership Entities.
The Receiver responds by claiming that he “identified the creditor in his pleadings.” Aplee.‘s Resp. Br. at 19. More specifically, he contends that “the Receiver, standing in the shoes of the defrauded Receivership Entities, is the creditor.” Id. (emphasis added). This, he argues, is consistent with our standing analysis in Klein v. Cornelius, 786 F.3d 1310 (10th Cir. 2015), in which we “recognized that a business entity abused by a fraudulent scheme qualifies as a defrauded creditor” and that a receiver could “assert the claims of the [entities] that were defrauded.” Aplee.‘s Resp. Br. at 19–20. As such, the Receiver contends that he “has standing to assert the claims under the UVTA.” Id. at 21. In our view, the Receiver has the better of this argument.
Appellants correctly note that the UVTA provides rights and remedies for defrauded creditors. See
Furthermore, we have consistently endorsed the view that the receiver of such defrauded entities has standing to recover fraudulent transfers under the UVTA. See id.; see also Wing v. Dockstader, 482 F. App‘x 361, 363 (10th Cir. 2012) (unpublished) (concluding that a receiver had standing to bring claims on behalf of the defrauded corporation under the UVTA);5 cf. Donell v. Kowell, 533 F.3d 762, 776–77 (9th Cir. 2008) (holding that a receiver had standing to bring claims on behalf of a defrauded entity under the California Uniform Fraudulent Transfer Act); cf. Eberhard v. Marcu, 530 F.3d 122, 132–33 (2d Cir. 2008) (analyzing Scholes and other relevant Seventh Circuit authority on receiver standing, and reasoning that the receiver “lacks standing” because he is not a receiver for the defrauded entity). As such, our precedent forecloses Appellants’ legal argument—viz., that a receiver may
Here, the Receiver stands in the shoes of the Receivership Entities. These entities were “evil zombies” under Mr. Johnson‘s spell and were used to advance Mr. Johnson‘s personal ends. More specifically, Mr. Johnson used the Receivership Entities to perpetuate and expand his fraudulent solar energy tax scheme. Accordingly, the Receivership Entities were injured and are considered defrauded creditors under the UVTA. Thus, once Mr. Johnson was removed, and the Receiver was put in place, the Receiver could assert the claims of the defrauded Receivership Entities. As such, we conclude that the Receiver had standing to assert the present claims under the UVTA.
B
Next, Appellants claim that the Receiver “failed to allege sufficient material facts to establish the essential elements of a fraudulent conveyance.” Aplts.’ Opening Br. at 21. Specifically, Appellants contend that the “clear majority of the facts alleged by [the Receiver] were not material and in no way related to any individual Appellant.” Id. at 20. Furthermore, Appellants assert “those facts which were alleged[ly] material to Appellants [were] by themselves insufficient to meet the elements of any of the asserted claims.” Id.
Although the Receiver acknowledges that many of the alleged “facts [did] not relate directly to the Appellants or their conduct,” he nonetheless contends that those facts “relate [to] the Receiver‘s claims in this lawsuit.” Aplee.‘s Resp. Br. at 18. In
Under the UVTA, a transfer is voidable if the debtor (i.e., the Receivership Defendants) made the transfer with the “actual intent to hinder, delay, or defraud any creditor of the debtor.”
Stated otherwise, the Receiver provided undisputed material facts which showed that the transfers were made to the Appellants with the “actual intent to hinder, delay, or defraud” creditors—viz., the Receivership Defendants, through the Receivership Entities, made transfers to the Appellants in order to advance and expand their fraudulent scheme. As such, the district court did not err in concluding that the undisputed material facts established the essential elements of a fraudulent conveyance.
C
1
Notably, Appellants claim that “even if the transfers were [made] for the purpose to hinder, delay or defraud the Receivership Entities, the good faith defense applies if Appellant[s] (a) took the transfer in good faith and (b) for reasonably equivalent value.” Aplts.’ Opening Br. at 26. Appellants note that the Receiver does
The Receiver concedes that the first prong of the good faith defense is not at issue in this appeal. See Aplee.‘s Resp. Br. at 21. However, the Receiver contends that “Appellants failed to present any evidence below or on appeal that the Receivership Entities received reasonably equivalent value from the payment of commissions to Appellants.” Id. at 22. Indeed, although Appellants assert that they expended substantial time and energy in marketing the solar lenses, the Receiver claims that is not “the relevant inquiry; the germane question is not what value Appellants gave, but what value Receivership Defendants received in exchange for the transfers.” Id. Furthermore, the Receiver contends that—even if Appellants provided income to the Receivership Defendants—“[c]ourts have consistently held that commissions paid to parties that promote a fraudulent scheme constitute fraudulent transfers and the recipients of the commission payments do not give reasonably equivalent value.” Id. at 24. As such, the Receiver argues that “[b]ecause the Receivership Entities did not receive any reasonably equivalent value . . . the
“The [UVTA] provides: ‘A transfer or obligation is not voidable under Subsection 25-6-[202](1)(a) against a person who took in good faith and for a reasonably equivalent value . . . .” Dockstader, 482 F. App‘x at 365 (omission in original) (quoting
“[I]n determining whether reasonably equivalent value was given, the focus is on whether the debtor received reasonably equivalent value from the transfer. In other words, the question is not whether [the transferee] ‘gave reasonably equivalent value; it is whether [the transferor] received reasonably equivalent value.‘” Miller v. Wulf, 84 F. Supp. 3d 1266, 1276 (D. Utah 2015) (footnote omitted) (quoting In re Lucas Dallas, Inc., 185 B.R. 801, 807 (B.A.P. 9th Cir. 1995)), aff‘d, 632 F. App‘x 937 (10th Cir. 2015) (unpublished); see also Klein v. Michelle Tuprin & Assocs., P.C., No. 2:14-CV-00302, 2016 WL 3661226, at *7 (D. Utah July 5, 2016).
As an initial matter, Appellants’ assertion that they expended substantial energy and time in marketing the solar lenses is irrelevant to the present inquiry. As noted supra, in determining whether reasonably equivalent value was given, our focus is solely on whether the debtor (i.e., the transferor) received reasonably equivalent value. See Miller, 84 F. Supp. 3d at 1276; Klein v. King & King & Jones,
Indeed, Appellants’ efforts and time were in service of an illegal and fraudulent scheme. In this regard, Appellants’ reliance on the income generated from the sale of the solar lenses is unavailing. That is because any income generated from Appellants’ actions were products of an illegal and fraudulent undertaking. As discussed supra, in effect, Appellants received these transfers for expanding and prolonging the Receivership Defendants’ fraudulent scheme. “Those who receive money for bringing new investors to a [fraudulent] scheme have not provided reasonably equivalent value within the meaning of the [UVTA].” Wing v. Holder, No. 2:09-CV-118, 2010 WL 5021087, at *2 (D. Utah Dec. 3, 2010); see also Miller v. Taber, No. 1:12-CV-74, 2014 WL 317938, at *2 (D. Utah Jan. 29, 2014) (“Those who receive money for bringing new investors to a scheme have not given reasonably equivalent value within the meaning of the [UVTA], and must return the money.“).
Indeed, “[i]t takes cheek to contend that in exchange for the payments [Appellants] received, [Receivership Defendants] benefitted from [their] efforts to extend the fraud by securing new investments.” Warfield v. Byron, 436 F.3d 551,
2
Moreover, even assuming arguendo that Appellants conferred a benefit upon the Receivership Entities by soliciting investors for the fraudulent scheme, that would still be insufficient to reverse the district court‘s decision. That is because the district court provided a second ground for rejecting Appellants’ good faith defense. Specifically, the district court stated that “reasonably equivalent value was not provided because the payments to [Appellants] were illegal since [Appellants were]
“Because [Appellants] did not challenge this basis for the district court‘s opinion [in either their Opening Brief or Reply Brief], the issue is [waived].” Dockstader, 482 F. App‘x at 366; see Becker v. Kroll, 494 F.3d 904, 913 n.6 (10th Cir. 2007) (“Federal Rule of Appellate Procedure 28(a)(9)(A) requires appellants to sufficiently raise all issues and arguments on which they desire appellate review in their opening brief. An issue or argument insufficiently raised in the opening brief is deemed waived.“); Anderson v. U.S. Dep‘t of Lab., 422 F.3d 1155, 1174 (10th Cir.
***
In sum, for the foregoing reasons, we conclude that the district court properly granted summary judgment to the Receiver on his UVTA claim. Next, we address whether the district court properly ordered disgorgement of the commissions paid to Appellants for allegedly violating state and federal securities laws.
V
A
Appellants first claim that “the Receiver lacked standing to assert disgorgement of commissions from the sale of the solar lenses.” Aplts.’ Opening Br. at 32. Specifically, Appellants assert that “[i]n the instant case, the Receiver lacked both constitutional and prudential standing.” Id. at 31. As with their UVTA standing claim, in discussing constitutional standing, Appellants again assert that “[t]he Receiver cannot claim an injury in fact when the injury was caused by the Receivership Entities in their capacity as the debtor.” Id. In other words, Appellants contend that the Receiver—standing in the shoes of the Receivership Entities—is not a creditor with constitutional standing to raise the present securities claims or to seek disgorgement of the commissions from the sale of solar lenses.
Furthermore, as to prudential standing, Appellants argue that the Receiver failed to satisfy the requirements of prudential standing because
As we have already discussed supra, the Receiver had constitutional standing because the Receivership Entities, in whose shoes the Receiver now stands, suffered an injury in fact through the actions of Mr. Johnson—who caused Receivership property to be paid to Appellants pursuant to illegal contracts and in violation of securities laws. Accordingly, the Receiver is asserting the Receivership Entities’ rights to recover the payments made pursuant to an illegal contract. Thus, in accordance with our precedent, we conclude that the Receiver had constitutional standing to seek disgorgement of the commissions paid to Appellants. See Cornelius, 786 F.3d at 1316–17; see also Janvey v. Brown, 767 F.3d 430, 437 (5th Cir. 2014) (“The ‘knowledge and effects of the fraud of the principal of a Ponzi scheme in making fraudulent conveyances of the funds of the corporations under his evil coercion are not imputed to his captive corporations.’ Because this knowledge is not imputed to the [receivership] entities, ‘the corporations in receivership, through the receiver, may recover assets or funds that the principal fraudulently diverted to third parties without receiving reasonably equivalent value.‘” (footnote omitted) (quoting Janvey v. Democratic Senatorial Campaign Comm., Inc., 712 F.3d 185, 190 (5th Cir. 2013))).
B
Next, Appellants appear to the challenge the district court‘s determination that the “solar lens purchase program constitute[d] a security because it [was] an
To the contrary, the Receiver claims that, in accordance with Securities and Exchange Commission v. W.J. Howey Co., 328 U.S. 293, 298–99 (1946), “the district court correctly held, as a matter of law, that the solar lens scheme was an investment contract subject to securities laws.” Aplee.‘s Resp. Br. at 32–33. Accordingly, the Receiver contends that “Appellants were required to be licensed to sell securities and the securities were required to be registered in accordance with securities laws. Because they were not, Appellants’ sale constituted a violation of Utah and Federal securities laws.” Id. at 33. We believe the Receiver has the better of this argument.
In order to determine whether a scheme constitutes an investment contract—and is subject to securities laws—we apply the three-part test outlined in Howey. See 328 U.S. at 298–99. A scheme constitutes an investment contract if it involves (1) an investment of money; (2) in a common enterprise; (3) with profits derived solely from the efforts of others. See id. at 301 (“The test is whether the scheme involves an investment of money in a common enterprise with profits to come solely from the efforts of others.“). “[T]he ultimate question of whether an instrument is a security is
Here, the first element of the Howey test is satisfied. Contrary to Appellants’ assertion, investors were not merely purchasing solar lenses for their own personal use. Instead, by acquiring the solar lenses, the investors were purchasing the right (1) to receive tax credits and deductions and (2) to share in the profits from future electricity sales. Indeed, as Appellants themselves acknowledge, “the purchaser would lease the lenses to one of the Receivership Defendants who would then pay lease payments back to the owner of the lens[es].” Aplts.’ Opening Br. at 29. Accordingly, it follows that the purchasers were investing money in the scheme with the expectation of future returns.
Furthermore, the purchasers were investing money in “a common enterprise.” As the district court correctly noted, the solar lenses would not be economically feasible, operating in isolation; instead, to eventually earn profits from the sale of electricity, investors needed the broader scheme to succeed. See Aplts.’ App., Vol. VII, at 26 (noting that the “fortunes of the investors were tied to the fortunes of the promoter in a common enterprise“). The Receiver also presented evidence showing that the Receivership Defendants “retained the lenses and controlled what happen[ed] to them (if anything).” Id., Vol. I, at 158 (Receiver‘s Mot. for Summ. J., filed Nov. 24, 2020); see also id., Vol. VII, at 6. Indeed, it is undisputed that investors did not even know which specific lens they owned—which severely undercuts Appellants’
Appellants attempt to avoid this conclusion by arguing that purchasers were not obligated to lease the lenses to the Receivership Defendants and, accordingly, could use the lenses however they wished. However, Appellants failed to identify record evidence showing that any customers took direct physical possession of their solar lenses. See Aplts.’ App., Vol. VII, at 5 (“Customers never took direct physical possession of their lenses.“); id., Vol. III, at 94 (Def. Janet Roe‘s Opp‘n to the Receiver‘s Mot. for Summ. J., filed Jan. 22, 2021). Furthermore, our conclusion would remain “unaffected by the fact that some purchasers [chose] not to accept the full offer of an investment contract by declining to enter into a service contract with the [Receivership Defendants].” Howey, 328 U.S. at 300–01. As such, the second element of the Howey test is satisfied.
Finally, the third element is also easily met—viz., profits derived solely from the efforts of others. It is undisputed that the “Receivership Defendants emphasized how little any customer would have to do with respect to ‘leasing out’ their lenses: ‘[s]ince LTB[1] install[ed], operate[d], and maintain[ed] [their] lenses for [them].‘” Aplts.’ App., Vol. VII, at 6 (first and second alterations in original). Furthermore, the district court found—and Appellants do not contest—that the investors “[did] not have special expertise in the solar energy industry.” Id. Thus, we may naturally
Accordingly, because all three elements of the Howey test are met, we conclude that the district court correctly determined that the solar lens scheme was an investment contract subject to securities laws. Thus, Appellants were required to be licensed to sell the securities and the securities were required to be registered in accordance with securities laws. Because neither of these requirements was met, Appellants’ sales violated Utah and federal securities laws.
C
Finally, we find no error in the district court‘s decision to order disgorgement of the commission payments. Indeed, district courts have broad discretion to order disgorgement. See SEC v. Maxxon, Inc., 465 F.3d 1174, 1179 (10th Cir. 2006) (“The district court has broad discretion not only in determining whether or not to order disgorgement but also in calculating the amount to be disgorged.” (quoting SEC v. First Jersey Sec., Inc., 101 F.3d 1450, 1474–75 (2d Cir. 1996))); cf. SEC v. Vescor Cap. Corp., 599 F.3d 1189, 1194 (10th Cir. 2010) (“It is generally recognized ‘that the district court has broad powers and wide discretion to determine . . . relief in an equity receivership.‘” (omission in original) (quoting SEC v. Safety Fin. Serv., Inc., 674 F.2d 368, 372–73 (5th Cir. 1982))).
Here, the district court found that Appellants obtained commission payments from the Receivership Defendants pursuant to illegal contracts and in violation of securities laws. Surely then, disgorgement—viz., the act of returning payments or
VI
For the foregoing reasons, we AFFIRM the district court‘s judgment.