Hafen v. Howell.
No. 23-4116. 11/15/2024. D.Utah. Judge Phillips. Ponzi Scheme—Utah Uniform Voidable Transactions Act—Ponzi Presumption—Recovery of Profits—Prejudgment Interest—Liability for Judgment—Sufficiency of Evidence.
November 15, 2024
Les and Gretchen Howell, a married couple, invested in the Silver Pool, a silver-trading scheme operated by Rust Rare Coin. Silver Pool was later exposed as a Ponzi scheme, and the government shut it down. The Commodity Futures Trading Commission (CFTC) brought an enforcement action against Rust, the scheme’s operator, and the district court appointed Hafen as receiver to recover assets fraudulently transferred through the scheme. Gretchen was about $75,000 short of recovering her investment when the government shut down the scheme, but Les profited about $3.2 million above his roughly $1.2 million investment. Les used his profits to buy land in Kingman, Arizona (the property), where he built a house that he lives in with Gretchen. At some point, Les made Gretchen a joint tenant in the property, gifting her a one-half share. Hafen brought this ancillary action against Les and Gretchen under the Utah Uniform Voidable Transactions Act (UVTA) to recover the $3.2 million in profit that Les made from the scheme, asserting claims for fraudulent transfer and unjust enrichment. The district court applied the Ponzi presumption, presuming that all distributions to Gretchen and Les were fraudulent. It granted Hafen summary judgment against Les and Gretchen on the fraudulent transfer claims but declined to reach the unjust enrichment claim because the fraudulent transfer ruling gave Hafen complete relief. On the parties’ Fed. R. Civ. P. 59(e) motions, the district court entered an amended judgment awarding Hafen prejudgment interest and clarifying that Gretchen was liable for $1.5 million of the total money judgment.
On appeal, the Howells argued that the UVTA precludes a Ponzi presumption. While the Howells waived this argument by raising it for the first time on appeal, the Tenth Circuit clarified that its UFTA case law applying the Ponzi presumption extends to the UVTA.
The Howells also argued that the district court erred in granting Hafen summary judgment because it relied on statements made by Rust that are inadmissible hearsay. Here, before Rust pleaded guilty to conspiracy to commit wire fraud, conspiracy to commit money laundering, and securities fraud, he spoke with investigators, law enforcement, and the sentencing court about how he operated Rust Rare Coin. The submissions in support of Hafen’s motion for summary judgment quote some of those statements. The district court found that Rust’s statements “confirmed” its finding that the Silver Pool was a Ponzi scheme but noted that undisputed facts from other sources provided sufficient support for the Ponzi scheme determination. Therefore, without deciding whether Rust’s statements would be admissible, the Tenth Circuit concluded that the Howells’ argument failed because the district court’s decision did not depend on the challenged statements.
The Howells further contended that the district court erred in granting Hafen summary judgment because it relied on inadmissible evidentiary submissions from three witnesses. However, the Howells did not demonstrate that the district court abused its discretion in qualifying Hafen as an expert in Ponzi schemes or relying on his report. Similarly, the Howells failed to explained how the district court abused its discretion in relying on the expert report of Strong, an accountant and fraud examiner; and the report and declaration of Shaw, another accountant and fraud examiner.
The Howells also asserted that the district court erred in finding it undisputed that Les received at least $3.2 million in profits, maintaining that this amount is too high. They contended that Les was a creditor of Rust Rare Coin for his principal investment and was thus entitled to prejudgment interest at a rate of 10% per year on that initial investment under the current version of Utah Code § 15-1-1, which allows a 10% per year interest rate for breaches of contracts in which the parties have agreed that an interest rate applies but have not specified a rate. However, the current version of § 15-1-1 became effective after Les made his investments, and it does not apply retroactively; the Howells failed to argue how Les’s investments were a loan or forbearance; and Les did not show that he was damaged or that he has a judgment against Rust Rare Coin from which prejudgment interest would accrue. Accordingly, Les has no right to interest on his principal investment, so the district court properly denied him prejudgment interest.
The Howells further maintained that the district court erred by allowing prejudgment interest despite Hafen’s delay in requesting it. But they did not explain why Hafen’s delay should prevent relief where, as here, the district court found that the award was justified under Rule 59(e) given the need to prevent manifest injustice. Further, the Howells cited no authority to support their position that the 5% interest rate was incorrect.
Lastly, the Howells argued that the district court erred in entering judgment against Gretchen without sufficient evidence to support it. Here, the court clarified that Gretchen was liable for $1.5 million, half of Les’s investment in the property, by relying on Les’s testimony that he invested about $3–4 million in the property. The district court did not abuse its discretion in relying on Les’s testimony, which was based on his personal knowledge. However, under the UVTA, the judgment against Gretchen must equal the value of her interest in the property when it was transferred to her. Accordingly, the court abused its discretion by relying solely on Les’s testimony to conclude that Gretchen is liable for $1.5 million without any other evidence of the property’s value on the date of transfer to her.
The judgment was affirmed in part and reversed in part, and the case was remanded for further proceedings.