Lewis v. Taylor

COLORADO COURT OF APPEALS 2017COA13
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Court of Appeals No. 13CA0239
City and County of Denver District Court No. 12CV1699
Honorable Edward D. Bronfin, Judge
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C. Randel Lewis, solely in his capacity as Receiver,

Plaintiff-Appellee and Cross-Appellant,

v.

Steve Taylor,

Defendant-Appellant and Cross-Appellee.
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JUDGMENT REVERSED, ORDER VACATED,
AND CASE REMANDED WITH DIRECTIONS

Division IV
Opinion by JUDGE ASHBY
Freyre and Nieto*, JJ., concur

Announced February 9, 2017
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Lindquist & Vennum PLLP, Michael T. Gilbert, John C. Smiley, Theodore J.
Hartl, Denver, Colorado, for Plaintiff-Appellee and Cross-Appellant

Podoll & Podoll, P.C., Richard B. Podoll, Robert A. Kitsmiller, Dustin J. Priebe,
Greenwood Village, Colorado, for Defendant-Appellant and Cross-Appellee

*Sitting by assignment of the Chief Justice under provisions of Colo. Const. art.
VI, § 5(3), and § 24-51-1105, C.R.S. 2016.
¶1 Following remand instructions from the supreme court, we are

again presented with an issue of first impression in Colorado. We

must now decide whether the Colorado Uniform Fraudulent

Transfer Act (CUFTA) requires an innocent investor who profited

from his investment in a Ponzi scheme to return all funds in excess

of his principal investment. We conclude that such an innocent

investor may be entitled to keep some of the funds exceeding the

amount of his principal.

I. Background

¶2 In 2006, defendant, Steve Taylor, invested three million dollars

in a hedge fund run by Sean Mueller, a licensed securities broker.

During the period of his investment, Taylor received a series of

payments from the fund. Taylor withdrew all of his money in 2007,

about one year after investing, and made a profit of over $487,000.

¶3 In 2010, the Colorado Securities Commissioner discovered

that the hedge fund was a Ponzi scheme and Mueller was convicted

of various criminal offenses. The district court appointed plaintiff,

C. Randel Lewis, as receiver to collect and distribute Mueller’s

assets to the creditors and investors he defrauded through the

1
Ponzi scheme.1 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.

¶4 Both Lewis and Taylor moved the district court 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.

¶5 Taylor appealed. A division of this court held that the district

court erred by ruling that the claim was timely and reversed the

district court’s grant of summary judgment on that ground. Lewis

v. Taylor, 2014 COA 27M, ¶ 8. Based on this conclusion, the

division did not address whether CUFTA required Taylor to return

his net profits.

1 A “Ponzi scheme” is a fraudulent investment scheme in which
investors are paid from the principal amounts invested by later
investors.
2
¶6 Lewis appealed the division’s decision to our supreme court.

The supreme court reversed the division’s opinion, reinstated the

district court’s ruling that the CUFTA claim was timely, and

remanded the case to this court to “consider the alternate argument

on which [Taylor] appealed the trial court’s order.” Lewis v. Taylor,

2016 CO 48, ¶ 39. We therefore now address whether CUFTA

requires Taylor to relinquish any amount of money exceeding his

principal investment in the Ponzi scheme.

II. CUFTA and Ponzi Schemes

¶7 Taylor argues 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. We review an order

granting summary judgment de novo, applying the same legal

principles as the district court. See Hamon Contractors, Inc. v.

Carter & Burgess, Inc., 229 P.3d 282, 290 (Colo. App. 2009).

¶8 Granting summary judgment is proper “when the pleadings

and supporting documentation demonstrate that no genuine issue

of material fact exists and that the moving party is entitled to

judgment as a matter of law.” Credit Serv. Co., Inc. v. Dauwe, 134

3
P.3d 444, 445 (Colo. App. 2005). We, like the district court, give the

nonmoving party the benefit of all favorable inferences from the

undisputed facts. Id.

¶9 The CUFTA provision under which Lewis brought his claim,

section 38-8-105(1)(a), C.R.S. 2016, provides that “[a] transfer made

. . . by a debtor is fraudulent as to a creditor . . . if the debtor made

the transfer . . . . [w]ith actual intent to hinder, delay, or defraud

any creditor of the debtor.” The parties do not dispute that (1)

Mueller’s fund was Taylor’s debtor based on Taylor’s three million

dollar investment in the fund and (2) any transfers from the fund to

Taylor were fraudulent under section 38-8-105(1)(a).

¶ 10 However, CUFTA also 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.” § 38-8-109(1),

C.R.S. 2016. The parties agree that Taylor was an innocent

investor in the fund and withdrew his principal and profits in good

faith. They also agree that Taylor gave reasonably equivalent value

for the return of his principal. But the parties disagree about

whether Taylor gave reasonably equivalent value in exchange for his

receipt of the approximately $487,000 in net profits.

4
A. District Court Misapplied the Term “Reasonably Equivalent
Value” in Section 38-8-109(1)

¶ 11 Taylor argues that the district court erred by ruling that, as a

matter of law, he did not give reasonably equivalent value for

transfers he received in amounts exceeding his principal

investment. We agree.

¶ 12 The meaning of “reasonably equivalent value” is a question of

statutory interpretation that we review de novo. See Fischbach v.

Holzberlein, 215 P.3d 407, 409 (Colo. App. 2009). If the language of

the statute is clear and unambiguous, we give effect to its plain and

ordinary meaning. See Fleury v. IntraWest Winter Park Operations

Corp., 2014 COA 13, ¶ 7, aff’d, 2016 CO 41.

¶ 13 Whether a party has given reasonably equivalent value in

exchange for a transfer is a mixed question of law and fact that

requires a court to apply the proper definition of reasonably

equivalent value to “all the facts and circumstances surrounding

the transaction.” Schempp v. Lucre Mgmt. Grp., LLC, 18 P.3d 762,

765 (Colo. App. 2000). Market value is not “wholly synonymous”

with reasonably equivalent value, but it is an important factor for

courts to consider. Id.

5
¶ 14 Although no Colorado appellate court has addressed this

issue, courts in other jurisdictions that have enacted similar

versions of the Uniform Fraudulent Transfer Act (UFTA) have done

so. Among the courts that have addressed this issue, two lines of

opinions have developed. One line holds, as a matter of law, that

any payout of net profits by a Ponzi scheme operator to an investor

can never be given in exchange for reasonably equivalent value.

See, e.g., Donell v. Kowell, 533 F.3d 762, 777 (9th Cir. 2008). The

other line rejects the idea that, based only on the fraudulent nature

of the Ponzi scheme, any payout in excess of an innocent investor’s

principal is necessarily not given in exchange for reasonably

equivalent value. See, e.g., In re Carrozzella & Richardson, 286 B.R.

480, 490-91 (D. Conn. 2002). Instead, these opinions require

courts to focus on what was actually given and received in the

specific transaction between the Ponzi scheme and the investor to

determine whether the investor gave reasonably equivalent value for

the net profits. Id.

¶ 15 Lewis, like the district court, relies on opinions from the first

line of cases. We find that line of cases unpersuasive and now

explain why.

6
¶ 16 In a widely cited case on which Lewis relies, the Ninth Circuit

explained that the purpose of the reasonably equivalent value

requirement in UFTA is to ensure that the only fraudulent transfer

that is allowed to stand is one that does not deplete the assets of

the Ponzi scheme and thereby hinder the scheme’s ability to pay

back innocent investors (creditors). Donell, 533 F.3d at 777. In the

words of the Ninth Circuit, the “reasonably equivalent value”

provision exists to “identify transfers made with no rational purpose

except to avoid creditors.” Id. Transfers that pay innocent

investors a net profit are made to avoid creditors because “[p]ayouts

of ‘profits’ made by Ponzi scheme operators are not payments of

return on investment from an actual business venture. Rather,

they are payments that deplete the assets of the scheme operator

for the purpose of creating the appearance of a profitable business

venture.” Id.

¶ 17 But in a Ponzi scheme, all transfers to investors, whether they

constitute net profits or repayment of principal, are made with the

principal of later investors. Because all of these transfers “deplete

the assets of the scheme operator for the purpose of creating the

appearance of a profitable business venture,” id., none is supported

7
by reasonably equivalent value as defined by the Ninth Circuit.

This is inconsistent with the Ninth Circuit’s ultimate holding that

transfers repaying principal are supported by reasonably equivalent

value but transfers of net profits are not.

¶ 18 The Ninth Circuit attempted to mitigate this flaw in its

analysis by explaining that the return of an innocent investor’s

principal is nevertheless given for reasonably equivalent value

because such transfers “are settlements against the defrauded

investor’s restitution claim.” Id. This rationale is also fraught with

contradiction. If we consider the value of a defrauded investor’s

restitution claim, should we not also consider the amount of

prejudgment interest to which the defrauded investor would be

entitled? And would this not increase the amount of any such

settlement so that the value of the settlement is greater than the

principal investment? These practical issues aside, we conclude

that it is improper in the first place, when determining what

constitutes reasonably equivalent value under CUFTA, to consider a

purely hypothetical restitution claim that an innocent investor

might have brought and succeeded on had the investor not

recovered the principal.

8
¶ 19 Other courts have reached the same conclusion as the Ninth

Circuit by a different, but, in our view, equally questionable route.

In another widely cited case on which Lewis relies, the Seventh

Circuit in Scholes v. Lehmann, 56 F.3d 750 (7th Cir. 1995),

employed an equitable and moral analysis that, we think, strays too

far from the proper and limited inquiry of whether the innocent

investor accepted the transfer for reasonably equivalent value. In

Scholes, an innocent investor invested $2.5 million in, and netted

almost $300,000 from, what was later discovered to be a Ponzi

scheme. Id. at 755. The Seventh Circuit’s task was to decide

whether the Ponzi scheme’s transfer of the net profits to the

innocent investor violated Illinois’ version of UFTA. Id. at 756. Like

CUFTA, the Illinois statute provided that a transfer is fraudulent

and voidable if the transferor makes it “without receiving a

reasonably equivalent value in exchange.” Id. (quoting 740 Ill.

Comp. Stat. 160/5(a)(2) (1995)).2

2 As we understand Scholes, the Seventh Circuit held that its
reasoning applied equally to Illinois’ pre-UFTA statute and Illinois’
UFTA statute.
9
¶ 20 The Seventh Circuit began by considering the application of

the statutory provision in a moral context:

unless a fair in the sense of equal (or at least
approximately equal) exchange is insisted
upon, loopholes are opened in the fraudulent
conveyance statute that can only be described
as immoral — a relevant consideration, when
we consider the equitable origins of the
concept of fraud. We said that [innocent
investor’s] profit was supported by
consideration. But what was the source of the
profit? A theft by [the Ponzi scheme operator]
from other investors. What then is [the
innocent investor’s] moral claim to keep his
profit? None, even if the intent in paying him
his profit was not fraudulent.

Id. at 757. Purportedly returning to the statute it was applying, the

Seventh Circuit held that the innocent investor was

entitled to his profit only if the payment of that
profit to him, which reduced the net assets of
the estate now administered by the receiver,
was offset by an equivalent benefit to the
estate. It was not. A profit is not offset by
anything; it is the residuum of income that
remains when costs are netted against
revenues. The paying out of profits to [the
innocent investor was] not offset by further
investments by him conferred no benefit on the
corporations but merely depleted their
resources faster.

10
Id. (citation omitted). With that, the Seventh Circuit held that the

innocent investor could keep his principal but not the net profit. Id.

at 757-58.

¶ 21 A significant problem with this analysis is that it ignores the

fact that the value that an investor gives by investing is not limited

to the precise dollar amount of the principal investment. The value

also includes the use of that money for however long it was

available for investment or any other use. Thus, the Seventh

Circuit’s analysis “ignore[s] the universally accepted fundamental

commercial principal [sic] that, when you loan an entity money for a

period of time in good faith, you have given value.” Carrozzella &

Richardson, 286 B.R. at 489.

¶ 22 We recognize that in the context of a Ponzi scheme, the

investors’ principal is not invested as promised, and the time value

of an innocent investor’s principal does not increase the scheme’s

net worth. But reasonably equivalent value “include[s] both direct

and indirect benefits to the transferor, even if the benefit does not

increase the transferor’s net worth.” Leverage Leasing Co. v. Smith,

143 P.3d 1164, 1167 (Colo. App. 2006). Regardless of whether a

Ponzi scheme uses an innocent investor’s money for proper or

11
fraudulent purposes, it nevertheless receives the benefit of the use

of that money for a period of time. And the use of that money for a

period of time has value. See Carrozzella & Richardson, 286 B.R. at

489.

¶ 23 In addition to the problems with Donell and Scholes identified

above, we note one more which those opinions have failed to

resolve. Under Donell, Scholes, and opinions like them, payments

from a Ponzi scheme to trade creditors like landlords and utility

companies for legitimately provided services would be subject to

avoidance if those trade creditors profited at all from the

transaction. These payments, just like the payment of net profits to

innocent investors, are funded by the principal invested by other

investors. This, coupled with the fact that they are made to

perpetuate the Ponzi scheme, means that they are made with

“actual intent to hinder, delay, or defraud any creditor” of the

scheme and are therefore fraudulent. § 38-8-105(1)(a). And even if

the trade creditors take the payments in good faith, under Donell

and Scholes, any amount of that payment in excess of the utility

company’s or landlord’s costs would not be for reasonably

equivalent value under section 38-8-109(1). See In re Unified

12
Commercial Capital, Inc., 260 B.R. 343, 352 (Bankr. W.D.N.Y.

2001); see also Carrozzella & Richardson, 286 B.R. at 490 (citing

Unified Commercial Capital, 260 B.R. at 352).

¶ 24 Although we find the reasoning in the cases cited by Lewis

flawed and unpersuasive, we nevertheless recognize that the courts

that authored them, and the district court here, were motivated by

the laudable goal of attempting to mitigate the harm to defrauded

creditors in a fair and equitable manner. But when applying a

provision in a statute, it is our job to apply the plain and ordinary

meaning of the words in the statute even when doing so may

conflict with our own view of what is the most fair or equitable

result. We suspect that the flaws that we perceive in the analysis of

the opinions discussed above emanate from an attempt to apply

fraudulent conveyance statutes to circumstances for which they

were not legislatively designed. As the court stated in Unified

Commercial Capital, 260 B.R. at 350,

[b]y forcing the square peg facts of a “Ponzi”
scheme into the round holes of the fraudulent
conveyance statutes in order to accomplish a
further reallocation and redistribution to
implement a policy of equality of distribution
in the name of equity, I believe that many
courts have done a substantial injustice to

13
those statues and have made policy decisions
that should be made by Congress.

¶ 25 We are not the first court to have disagreed with the reasoning

of cases like Donell and Scholes. The Carrozzella & Richardson

court, among others, did so too, and identified the fundamental flaw

in the reasoning of those cases: the improper focus on the overall

nature and propriety of the transferor’s business rather than, as the

statute requires, whether the transferor received reasonably

equivalent value for the transfer. See Carrozzella & Richardson,

286 B.R. at 488-89 (“The statutes and case law do not call for the

court to assess the impact of an alleged fraudulent transfer in a

debtor’s overall business.” (quoting In re Churchill Mortg. Inv. Corp.,

256 B.R. 664, 680 (Bankr. S.D.N.Y. 2000))). As the Carrozzella &

Richardson court explained, the reasonably equivalent value

provision in UFTA, which is identical to that in CUFTA, requires “an

evaluation of the specific consideration exchanged by the

[transferor] and the transferee in the specific transaction which the

[receiver] seeks to avoid, and if the transfer is equivalent in value, it

is not subject to avoidance under the law.” Id. at 489 (quoting

Churchill, 256 B.R. at 680). We agree with the Carrozzella &

14
Richardson court that we cannot read a Ponzi scheme exception

into CUFTA that would allow us to examine the propriety of the

transferor’s business when determining whether a transferee gave

reasonably equivalent value for a transfer.

¶ 26 Ultimately, no matter how tempting, we may not look beyond

the plain language of the statute to decide which transfers from a

Ponzi scheme are voidable and which are not. The General

Assembly may wish to revisit this issue and craft a different statute

that it determines more fairly addresses these circumstances.

Perhaps it should, especially given that courts have engaged in

such unconvincing analytical gymnastics to effect equitable

remedies by way of fraudulent transfer statutes. If it does craft a

new statute, the General Assembly may wish to consider the

arguments advanced by cases like Scholes, or equitable principles

embodied in doctrines such as the clean hands doctrine. See

Premier Farm Credit, PCA v. W-Cattle, LLC, 155 P.3d 504, 519 (Colo.

App. 2006) (“[A] party engaging in improper or fraudulent conduct

relating in some significant way to the subject matter of the cause

of action may be ineligible for equitable relief.”). But it is not our

place to apply such equitable principles in circumstances where, as

15
here, there is an unambiguous statute to apply. Instead, we must

apply the plain language that the General Assembly chose in

enacting CUFTA. And section 38-8-109(1), like the rest of CUFTA,

addresses the propriety of a transfer, not the propriety of the

transferor’s overall business. Accordingly, any evaluation of what

constitutes reasonably equivalent value in this case must address

what was actually exchanged, not how the hedge fund fraudulently

used whatever it received in the exchange. This evaluation cannot

ignore the fact that there is value in the use of money for a period of

time.

¶ 27 We therefore conclude that the district court erred by not

accounting for the time value of Taylor’s principal investment when

determining whether he gave reasonably equivalent value under

section 38-8-109(1) for transfers he received from Mueller’s fund.

B. Remand is Necessary

¶ 28 We would normally prefer to give the trial court more specific

guidance on remand. And, under different circumstances, we might

have been able to properly apply section 38-8-109(1) ourselves to

determine which transfers are voidable and which are not. But

whether “reasonably equivalent value” has been given is a question

16
of fact. See In re Zeigler, 320 B.R. 362, 374 (Bankr. N.D. Ill. 2005).

And because the district court did not make findings about any

individual transfers, we cannot do so and must remand for the

district court to make additional findings.

¶ 29 Section 38-8-109(1) is unambiguous in describing

circumstances under which “a transfer” is voidable. The plain and

ordinary meaning of this section therefore requires courts to decide

whether individual transfers are voidable. See Fleury, ¶ 7 (when

interpreting a statute that is clear and unambiguous, we give effect

to its plain and ordinary meaning).

¶ 30 The district court’s findings of undisputed material facts

suggested that there were individual transfers, but did not identify

any of them. The district court found that “[b]etween September 1,

2006 and April 19, 2007, a total of $3,487,305.29 was paid out to

Mr. Taylor from the Mueller Funds (the Ponzi scheme). This

represents a return of all $3 million in principal he invested, plus

an additional profit of $487,305.29 (‘Net Profit’).” We presume from

this finding that (1) Taylor received a series of transfers from

Mueller’s fund and (2) the district court aggregated the value of

these unidentified individual transfers and then determined that

17
the portion of the aggregate Taylor received that exceeded his

principal investment was not, as a matter of law, supported by

reasonably equivalent value.

¶ 31 This analysis violates the plain language of section 38-8-109(1)

requiring courts to evaluate whether “[a] transfer” is voidable, not

whether portions of the aggregate of several transfers are voidable.

And because the district court’s factual findings do not identify the

individual transfers, we are unable apply section 38-8-109(1)

ourselves.

¶ 32 We must therefore remand the case to the district court to

make additional findings about the individual transfers Taylor

received from Mueller’s fund and to consider whether Taylor

received the transfers for reasonably equivalent value.

III. Other Issues

¶ 33 Because we reverse the district court’s order granting

summary judgment, we vacate the court’s order awarding costs and

interest to Lewis. But because the supreme court’s remand order

directed us only to “consider the alternate argument on which

[Taylor] appealed the trial court’s order,” Lewis, 2016 CO 48, ¶ 39,

we do not address Taylor’s argument that the district court erred by

18
dismissing his counterclaim for rescission of the investment

contract with Mueller. We nevertheless note that even if the

supreme court’s remand order allowed us to consider this

argument, we could not because the investment contract is not part

of the record on appeal.

IV. Conclusion

¶ 34 The district court’s order granting Lewis summary judgment is

reversed and the case is remanded to the district court with

directions to determine whether Taylor received any individual

transfers for reasonably equivalent value as that term is explained

in this opinion. Based on that determination, the district court

should rule on both Taylor’s and Lewis’ motions for summary

judgment and conduct further proceedings as it deems appropriate.

JUDGE FREYRE and JUDGE NIETO concur.

19