Miller v. Harding ( 2000 )

[NOT FOR PUBLICATION--NOT TO BE CITED AS PRECEDENT]
United States Court of Appeals
For the First Circuit
No. 00-1245
C. GERARD MILLER,
Plaintiff, Appellee,
v.
CHARLES E. HARDING, JR.,
Defendant, Appellant.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. William G. Young, U.S. District Judge]
Before
Torruella, Chief Judge,
Stahl and Lipez, Circuit Judges.
Jeffrey N. Roy with whom Ravech & Roy, P.C. was on brief for
appellant.
Gerry D'Ambrosio for appellee.
DECEMBER 5, 2000
Per Curiam. Charles Harding, the defendant, appeals
a district court order denying his motion for summary judgment
and granting that of the plaintiff, Gerard Miller. Miller had
sued Harding for being the recipient of a fraudulent conveyance
from a third party, Keith Dominick, the operator of a Ponzi
scheme.1 Because Harding has not raised, and thus has waived,
the one argument that could merit a reversal, we affirm.
I. BACKGROUND
The following facts have been drawn from the district
court's opinion in this case, as well as from CFTC v. Dominick,
1996 WL 406833 (M.D. Fla. 1996).
Keith Dominick operated his Ponzi investment scheme
from February 1992 through April 1994. During that time, he
took investments from approximately 70 pool participants, adding
up to a total of $5.9 million. He represented to these
investors that their money was to be invested in the commodities
market, and that they would receive very high returns. Over the
course of those years, Dominick in fact invested only about $2
1
A Ponzi scheme is a fraudulent investment strategy wherein
early investors are paid phony returns using later investors'
money. These returns, which tend to be unusually high, serve as
a marketing tool to lure in new investors. Little, if any, of
the money ever gets invested as promised, and the scheming pool
operator embezzles much of it. Dominick ran such a scheme from
early 1992 through April 1994. He did so by selling shares in
an investment company he had acquired to implement the ruse.
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million of the $5.9 million he attracted. The remainder was
either dispersed to early investors as a spur to attract new
business, or embezzled for his own needs (including the purchase
of his home and the payment of his federal taxes, among other
things). On September 14, 1993, in furtherance of his
activities, Dominick acquired Main Street Investment Group, Inc.
[hereinafter "Main Street" or the "corporation"]. After that
date, he conducted his investment/Ponzi scheme through that
entity.
Harding made all of his investments between September
and December, 1992. During that period, he invested a total of
$185,000. Subsequently, over the period of time from December
1992 through February 1994, he received "returns" on his
investment totaling $497,000. In November 1993, Miller, a
lawyer, purchased 5,000 shares in Main Street at a cost of $200
per share, for a total of $1 million. He received one return on
his investment, $3,500 in the form of a wire transfer to a third
party made at his request, but lost the remaining $996,500
entirely. In April 1994, Miller reported what he believed to be
suspicious activity by Main Street and Dominick to the FBI and
the CFTC. On June 15, 1994, the CFTC filed a complaint against
Dominick and Main Street in the United States District Court for
the Middle District of Florida, alleging violations of the
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Commodity Exchange Act, 7 U.S.C. §§ 1 et seq. As a result of
that filing, an equity receiver for both Main Street and
Dominick was appointed. The receiver was granted very broad
powers with respect to Dominick and Main Street.2
The equity receiver demanded $312,000 from Harding,
representing the difference between Harding's investment and his
return. Ultimately, Harding settled with the receiver for
$215,000. Later, in the United States District Court for the
District of Massachusetts, Miller sued Harding for $97,000, the
remainder of his profit, on the basis that this sum had been
fraudulently conveyed to Harding by Dominick, a tort debtor of
2
The equity receiver was granted the power to take over
Dominick's and Main Street's assets, including funds of
investors, and to
investigate the assets, liabilities, transfers of real
and personal property, commodity trading activity and
commodity pool operation of defendants Dominick and
Main Street and institute such actions and legal
proceedings as the Receiver deems necessary against
individuals, corporations, partnerships, associations
or unincorporated organizations for the purpose of
recovering funds or property of defendants Dominick
and Main Street, including funds of investors, which
the Receiver may claim to be wrongfully or improperly
in the possession, custody or control of others.
CFTC v. Dominick, No. 94-661-CIV-ORL-18 (M.D. Fla. July 15,
1994) (agreed order of preliminary injunction and appointment of
receiver). The equity receiver was to represent the interests
of the corporation and its investors.
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Miller.3 Harding defended on the ground that Miller's claim
involved harm to the corporation, and thus belonged to the
equity receiver, who had already settled it. Harding did not
respond to Miller's argument that he was suing on the basis of
a transfer from Dominick, as his tort debtor, and not one from
the corporation. The district court granted summary judgment to
Miller and denied it to Harding, awarding Miller $97,000. This
appeal followed.
3 Miller is a tort creditor of Dominick on the basis of
Miller's claim for fraud in the inducement. Miller obtained a
default judgment against Dominick for this tort on May 7, 1997,
but Dominick was judgment-proof.
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II. DISCUSSION
An equity receiver, like a bankruptcy trustee, has
standing for all claims that would belong to the entity in
receivership, and which would thus benefit its creditors and
investors, but no standing to represent the creditors and
investors in their individual claims. See Scholes v. Lehmann,
56 F.3d 750, 753 (7th Cir. 1995) (addressing this issue in a
Ponzi scheme receivership case); see also Fisher v. Apostolou,
155 F.3d 876, 879 (7th Cir. 1998) (making the same observation
in a bankruptcy case). For this reason, Miller's only possible
claim against Harding is for a fraudulent conveyance from
Dominick himself, as an individual tort debtor to Miller, and
not for a fraudulent conveyance from the corporation in which
Miller had invested. The latter claim belonged to the receiver,
who has already settled it. We shall thus consider Miller's
complaint only to the extent that it is based on the former
theory and not the latter.
Miller's complaint did not properly allege a fraudulent
conveyance. We have described the nature of an appropriate
fraudulent conveyance claim by setting out the three paradigm
examples. See Boston Trading Group, Inc. v. Burnazos, 835 F.2d
1504, 1508 (1st Cir. 1987). In all three examples the debtor
transferred his own funds to someone else in an effort to avoid
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payment to his creditors. See id. Because the creditor's claim
is against the transferor of the funds, the only money to
consider is that which in fact belongs (or belonged, prior to
the transfer) to the debtor.
In his own complaint, however, Miller makes it clear
that the monies transferred to Harding never did rightfully
belong to Dominick. The gravamen of Miller's allegations is
that, with respect to both his investments and the investments
of others, Dominick wrongfully diverted funds earmarked for
investment in the commodities market to his own use or to early
investors in the Ponzi scheme (such as Harding). By accusing
Dominick of wrongfully siphoning funds for his own use, Miller
unwittingly acknowledges the defect in his claim. The complaint
thus fails to set forth an essential element of Miller's claim
against Harding: that the $97,000 sought in this lawsuit ever
belonged to Dominick.
Unfortunately, however, Harding has failed to
appreciate the nature of Miller's claim from beginning to end,
and thus has not responded to it. In the district court, and
now again on appeal, Harding missed the essential theory of
Miller's case: that, as the victim of Dominick's fraudulent
inducement, he (Miller) was a tort creditor of Dominick's since
the time of his investment. Absent the key defect we have
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pointed out, this could be the basis for a valid claim of
fraudulent conveyance. Harding thus overlooked the fact that
this was a separate claim that belonged to Miller, and not to
the corporation, and failed to defend himself against it by
pointing out the defect. As a result of this oversight, some of
Harding's appellate arguments, like his summary judgment
arguments, are entirely beside the point.
There are, however, three arguments presented by
Harding which, if we were to accept, would provide bases for
overturning the district court's judgment in favor of Miller:
(1) that Miller is collaterally estopped from relitigating the
question of Harding's total liability; (2) that there was
adequate consideration for the transfer; and (3) that the
district court misinterpreted the definition of "creditor" under
fraudulent transfer law. On the latter two issues, which go to
the merits of Miller's claim, we adopt the reasoning of the
district court and affirm on those bases. As to collateral
estoppel, however, we differ with the district court's holding
that Miller and the receiver lack privity and that Miller did
not have a full and fair opportunity to litigate whether the
$97,000 sought in this lawsuit was fraudulently transferred.
The fact remains, however, that the Florida proceedings are not
yet final, and the equity receiver's settlement with Harding is
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still susceptible of being set aside. Collateral estoppel thus
cannot apply. See Biggins v. Hazen Paper Co., 111 F.3d 205,209
(1st Cir. 1997) ("Collateral estoppel, now often called issue
preclusion, prevents a party from relitigating at a second trial
issues determined between the same parties by an earlier final
judgment . . .").
Although Harding may not have achieved the result he
expected when he settled with the equity receiver, that is due
to his failure to controvert the claim that Miller has made
against him in this action. As a policy matter, individuals in
Harding's position should be able to settle with receivers
without fear of this sort of litigation. Because Miller's
success in this case is due Harding's waiver of the proper
defense, we do not expect that it will encourage future actions
among parties similarly situated to those here.
Accordingly, and with some reticence, the opinion below
is AFFIRMED. No costs.
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