Wagner et al v. Lankford et al

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UNITED STATES BANKRUPTCY COURT
DISTRICT OF NEW MEXICO
In re: VAUGHAN COMPANY, REALTORS, Case No. 10-10759
Debtor.
JUDITH A. WAGNER, Chapter 11 Trustee
Of the bankruptcy estate of the Vaughan Company,
Realtors,
Plaintiff,
v. Adv. No. 12-1139
DAVID LANKFORD and
LEE ANN LANKFORD,
Defendants.
MEMORANDUM OPINION
THIS MATTER is before the Court on the Motions for Summary Judgment (the
“Motions” or “Motions for Summary Judgment”) filed by the Chapter 11 Trustee. See Docket
Nos. 52 and 56. The Trustee seeks to recover as fraudulent transfers all fictitious profits paid by
the Debtor to Defendants David and Lee Ann Lankford pursuant to a Ponzi scheme. The
Lankfords contend, among other things, that the litigation is fundamentally unfair and that any
recoverable amounts should be reduced by the taxes and fees they paid before using the funds.
After considering the Motions, the Lankfords’ responses and supplemental responses, and the
supporting papers, and being otherwise sufficiently informed, the Court finds the Motions should
be granted, as described below.
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SUMMARY JUDGMENT STANDARDS
Summary judgment will be granted when the movant demonstrates that there is no
genuine dispute as to a material fact and that the movant is entitled to judgment as a matter of
law. See Fed.R.Civ.P. 56(a), made applicable to adversary proceedings by Fed.R.Bankr.P. 7056.
“[A] party seeking summary judgment always bears the initial responsibility of informing the ...
court of the basis for its motion, and ... [must] demonstrate the absence of a genuine issue of
material fact.” Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265
(1986). In considering a motion for summary judgment, the Court must “examine the factual
record and reasonable inferences therefrom in the light most favorable to the party opposing
summary judgment.” Wolf v. Prudential Ins. Co. of America, 50 F.3d 793, 796 (10th Cir. 1995)
(quoting Applied Genetics Int’l, Inc. v. First Affiliated Sec., Inc., 912 F2d 1238, 1241 (10th Cir.
1990)). “[A] party opposing a properly supported motion for summary judgment may not rest on
mere allegations or denials of his pleading, but must set forth specific facts showing that there is
a genuine issue for trial” through affidavits or other supporting evidence. Anderson v. Liberty
Lobby, Inc., 477 U.S. 242, 256, 106 S.Ct. 2505, 91 L.Ed .2d 202 (1986).
PROCEDURAL BACKGROUND
The Trustee commenced the above-captioned adversary proceeding in February, 2012.
She sought to avoid certain transfers from the Vaughan Company Realtors (“VCR”) to the
Lankfords, jointly, and to David Lankford, individually, pursuant to 11 U.S.C. §§ 544 and 548
and New Mexico’s version of the Uniform Fraudulent Transfer Act (“UFTA”), N.M.S.A. 1978
§§ 56-10-18 and (19). Based on her review of spreadsheets maintained by VCR reflecting Form
1099 interest disclosures, the Trustee originally asserted that the Lankfords jointly received at
least $144,976.56 in transfers from VCR over the life of their investments and that David
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Lankford, individually, received $199,160.47 during such time. The Lankfords disputed the
accuracy of those figures. In August 2013, the Court directed the Trustee to explain her
calculations to the Lankfords. After obtaining additional financial documents, the Trustee
determined that the complaint overstated the amounts paid to the Lankfords, jointly, by
$4,037.24 and to David Lankford, individually by approximately 40-60 cents. The Trustee
adjusted the amounts sought accordingly.
As a result of the Trustee’s accounting errors, the relationship between the litigants
deteriorated. The Lankfords requested leave to file a counterclaim against the Trustee and her
counsel for extortion, incompetence, and fraud. The Court denied the request because the
Lankfords did not make a prima facie showing that the Trustee or her counsel engaged in such
conduct. See Memorandum Opinion and Order Denying Motion to File Counterclaim (Docket
No. 81).
In September and October of 2013, the Trustee filed the Motions for Summary Judgment.
Although the Lankfords, who are unrepresented, made a good faith effort to respond to the
Motions, their original responses contained several procedural defects. In the interest of
reaching the merits of the parties’ arguments, the Lankfords were permitted to supplement their
responses pursuant to Fed.R.Civ.P. 56(e)(1). See Order Striking Sur-Reply, Allowing
Defendants to Supplement Response, and Vacating Trial Setting (Docket No. 86) (the “Order
Allowing Supplementation”). The Court gave the Lankfords instructions regarding how to
dispute the Trustee’s proffered facts as well as how to set forth additional facts in support of their
responses. The Court also warned both parties that it would only consider facts set forth in a
separate statement of material facts and supported by admissible evidence. The Lankfords then
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filed supplemental responses, to which the Trustee was given an additional opportunity to
respond.
By her Motions for Summary Judgment, the Trustee appears to have originally sought to
recover the entire amounts paid to the Lankfords, jointly, and David Lankford, individually,
within four years before the bankruptcy case was commenced. The Court understands that in her
supplemental replies, the Trustee limited the requested relief to recovery of the fictitious profits
paid to the Lankfords in excess of their initial investments in the Ponzi scheme (i.e. “Net
Winnings”).1 See Docket Nos. 93-94 (together the “Supplemental Replies”). For purposes of
this ruling, the Court therefore limited its focus to whether, and to what extent, the Lankfords,
jointly, and David Lankford, individually, received avoidable Net Winnings.
UNDISPUTED FACTS RELATING TO ALL PARTIES
A. VCR filed a voluntary petition under Chapter 11 of the Bankruptcy Code on
February 22, 2010 (the “Petition Date”). See Docket No. 1 in Case No. 10-10759.
B. The Trustee commenced the above-captioned adversary proceeding on February
21, 2012. See Trustee’s Complaint, Docket No. 1 in Adv. No. 12-1139.
1 Only the Supplemental Reply relating to David Lankford expressly states that if the Trustee obtains a
judgment in the amount of the Net Winnings, she will not attempt to recover greater amounts. However,
that intention is implicit in the Supplemental Reply relating to the Lankfords’ joint investment (Docket
No. 91). In that document, the Trustee states that she only seeks to recover Net Winnings on summary
judgment, not all of the amounts transferred during the four year look-back period. She also states that
the Lankfords’ contentions regarding the amount of transfers made to them during the four year look-back
period are moot. Based on these representations, the Court infers that the Trustee only seeks to recover
Net Winnings from the Lankfords in connection with their joint investments.
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UNDISPUTED FACTS RELATING TO THE LANKFORDS’ JOINT INVESTMENTS2
1. David and Lee Ann Lankford jointly invested a total of $95,000 in VCR’s
promissory note program (i.e. the Ponzi scheme). See Trustee’s Motion for Partial Summary
Judgment as to the Timing and Amount of the Transfers Against David Lankford and Lee Ann
Lankford on Account of Joint Investment (the “Motion Relating to the Joint Investment”)
(Docket No. 56), ¶ 2; Supplemental Response to the Motion Relating to the Joint Investment (the
“Joint Supplemental Response”) (Docket No. 91), p. 5 of 21.
2. From 2004 through the Petition Date, the Lankfords received $140,939.32 from
VCR on account of their joint investments in the Ponzi scheme. See Motion Relating to the Joint
Investment, ¶ 3; Joint Supplemental Response, p. 5 of 21.
3. VCR paid $45,939.32 more to the Lankfords than they originally invested.3 See
Motion Relating to the Joint Investment, ¶ 5; Undisputed facts No. 1 and 2.
4. VCR transferred the Net Winnings ($45,939.32) to the Lankfords within four
years before the Petition Date.4 See Motion Relating to the Joint Investment, ¶ 4; Affidavit of
Judith Wagner, Chapter 11 Trustee, attached as Exhibit C to the Motion Relating to the Joint
2 In finding the undisputed facts, the Court considered the Trustee’s Motion for Summary Judgment as to
the Timing and Amount of the Transfers to David Lankford and Lee Ann Lankford (Docket No. 56), the
Lankfords’ original objection to that motion (Docket No. 67), the Trustee’s original reply (Docket No.
70), the Lankfords’ supplemental response (Docket No. 91), the Trustee’s supplemental reply (Docket
No. 94), and all supporting papers accompanying those documents, to the extent such papers could be
presented in an admissible form at trial.
3 In their Joint Supplemental Response, the Lankfords contend that they did not benefit from much of the
Net Winnings. However, they did not specifically dispute the amount stated by the Trustee or offer
admissible evidence that they received a different amount before payment of taxes and IRA fees are taken
into account.
4 The parties dispute the exact amount transferred within four years before the Petition Date. The exhibits
attached to the Motion Relating to the Joint Investment, which include copies of the checks issued by
VCR to the Lankfords, establish that the Lankfords received over $100,000 during the four year look-
back period. The Lankfords did not offer admissible evidence to dispute this fact. Thus, calculated in
accordance with the “netting ruling,” as addressed below, the Court is able to conclude that principal was
repaid before any fictitious profits and that at least $45,939.32 in fictitious profits was transferred within
four years before February 22, 2010.
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Investment (Docket No. 56-3), ¶ 10; Checks reflecting payments from VCR to the Lankfords,
attached to the Trustee’s affidavit (Docket No. 56-4).
UNDISPUTED FACTS RELATING TO DAVID LANKFORD’S INVESTMENTS5
5. David Lankford individually invested a total of $177,695 in VCR’s promissory
note program. See Trustee’s Motion for Partial Summary Judgment as to the Timing and
Amount of the Transfers Against David Lankford (the “Motion Relating to David Lankford”)
(Docket No. 52), ¶ 2; Supplemental Response to the Motion Relating to David Lankford (“David
Lankford’s Supplemental Response”) (Docket No. 92), p. 2 of 46.
6. From 2003 through the Petition Date, David Lankford received $199,160.07 from
VCR on account of his individual investments in the Ponzi scheme. See Motion Relating to
David Lankford, ¶ 3; David Lankford’s Supplemental Response, p. 2 of 46.
7. VCR paid $21,465.07 more to David Lankford than he originally invested.6 See
Motion Relating to David Lankford, ¶ 6; Undisputed facts No. 1 and 2.
8. VCR transferred the Net Winnings ($21,465.07) to David Lankford within four
years before the Petition Date.7 See Motion Relating to David Lankford, ¶ 5; David Lankford’s
Supplemental Response, p. 3 of 46; Zia Trust Account Ledger titled “History for 1/1/1997 to
12/31/2011 for … David L. Lankford R/O IRA” and Summary of the Zia Ledger prepared by
5 In finding the undisputed facts, the Court considered the Trustee’s Motion for Summary Judgment as to
the Timing and Amount of the Transfers to David Lankford Individually (Docket No. 52), David
Lankford’s original objection to that motion (Docket No. 60), the Trustee’s original reply (Docket No.
68), the Lankfords’ supplemental response (Docket No. 92), the Trustee’s supplemental reply (Docket
No. 93), and all supporting papers accompanying those documents, to the extent such papers could be
presented in an admissible form at trial.
6 In his Supplemental Response, David Lankford contends that he did not benefit from much of the Net
Winnings. However, he did not dispute the amount stated by the Trustee or offer admissible evidence
that they received a different amount before payment of taxes and IRA fees are taken into account.
7 Mr. Lankford disputes the exact amount transferred within the four year look-back period. He admits,
however, that he received $106,409.78 within two years before the Petition Date. Thus, calculated in
accordance with the “netting ruling,” as addressed below, the Court is able to conclude that principal was
repaid before any fictitious profits and that at least $21,465.07 in fictitious profits was transferred within
four years before February 22, 2010.
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counsel for the Trustee, filed of record in connection with the Motion Relating to David
Lankford as Corrected Exhibit B (Docket No. 65).
DISCUSSION
The Trustee seeks summary judgment on her constructive fraud claims in the amount of
the Net Winnings paid to the Lankfords, jointly, and David Lankford, individually, during the
four year look-back period. Claims for constructive fraud generally require a showing that the
debtor: (1) transferred property within two or four years before the bankruptcy filing; (2)
received less than reasonably equivalent value for the transfer; and (3) was insolvent (or some
equivalent) at the time of the transfer. See generally 11 U.S.C. § 548(a)(1)(B); N.M.S.A. 1978 §
56-10-18(A)(1)(2).
By a memorandum opinion entered October 23, 2013, the Court found that, to the extent
a transfer was made to the Lankfords within four years before the Petition Date: (1) each transfer
constituted an interest of VCR in property; (2) VCR received less than reasonably equivalent
value in exchange for the transfer of any returns in excess of the Lankfords’ original investment
(i.e. Net Winnings); and (3) on the date of each transfer, VCR was insolvent and/or believed (or
reasonably should have believed) it would incur debts beyond its ability to repay.8 See Wagner
v. Oliva, et al, 500 B.R. 778 (Bankr.D.N.M. 2013) or Docket No. 74 in Misc. Adv. No. 12-0006.
The Court also determined that VCR operated as a Ponzi scheme from at least 2005 through the
Petition Date. Id. The only remaining issue with respect to the Trustee’s constructive fraud
claims is whether, and to what extent, the transfers actually occurred.
8 Because this adversary proceeding is one of over fifty such cases filed by the Trustee to recover returns
and profits paid pursuant to VCR’s Ponzi scheme, the Court consolidated various common issues of law
and fact. The memorandum opinion entered October 23, 2013 reflects the Court’s consolidated rulings as
set forth above.
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All parties agree on the total amounts the Lankfords, jointly, and David Lankford,
individually, invested in the Ponzi scheme. They also agree on the amounts each Defendant
received from VCR over the life of the investments. The main point in contention, at least for
purposes of this ruling, is how much “cash in hand” the Defendants actually received in excess
of their initial investment.
Normally, the Court would calculate such amount by applying the “netting rule.” Under
that rule, “[a]mounts transferred by the Ponzi scheme perpetrator to the investor are netted
against the [total] … amounts invested by that individual.” Donell v. Kowell, 533 F.3d 762, 771
(9th Cir. 2008). As one court explained:
If a given defendant received less than his undertaking, the amounts received should be
considered return of principal, regardless of how the parties’ may have designated them.
On the other hand, to the extent all transfers to a defendant exceeded his undertaking, the
amounts should be considered so-called earnings [net-winnings], regardless of the
parties’ designation.
In re Independent Clearing House Co., 77 B.R. 842, 851 n. 14 (D.Utah 1987). See also
Securities Investor Prot. Corp. v. Bernard L. Madoff Inv. Sec, LLC (In re Madoff Sec.), 476 B.R.
715, 729 (S.D.N.Y.2012) (adopting the “netting rule”); cf In re Hedged–Inv. Assocs., Inc.), 84
F.3d 1286, 1289 (10th Cir.1996) (suggesting that the liability of an investor depends on whether
they received payments from the Ponzi-perpetrator in excess of their original investment).
Here, the Lankfords argue that simply netting the total amount paid against the total
amount invested does accurately capture the amount of Net Winnings they received. First, they
appear to contend that they should be entitled to offset from the judgment any taxes and IRA fees
they paid on the transfers from VCR. The Tenth Circuit, following established precedent in
other circuits, has held that investors “are not entitled to offset taxes paid on their gains from [a]
… Ponzi scheme.” Wing v. Dockstader, 2012 WL 2020666, *4 (10th Cir.2012). See also Donell
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v. Kowell, 533 F.3d 762, 779 (9th Cir. 2008) (declining to “permit good faith investors to claim
offsets for taxes or other expenses paid in connection with receipt and management of income
from a Ponzi scheme”). As the Tenth Circuit explained:
Allowing offsets would frustrate the purposes of the [Uniform Fraudulent Transfer Act]
because there is no principle by which they could be limited, it would introduce difficult
problems of proof and tracing into each case, and any amount offset would necessarily
come at the expense of other investors.
Dockstader, 2012 WL 2020666, *4. The Lankfords are therefore not entitled to offset taxes or
IRA fees paid on their gains from VCR, at least in the context of the fraudulent transfer
litigation.
Next, the Lankfords contend they invested in good faith pursuant to 11 U.S.C. § 548(c)
and N.M.S.A. 1978 56-10-22(A).9 They point out, for example, that they researched VCR’s
promissory note program before investing and had no reason to doubt the integrity of Douglas
Vaughan, VCR’s principal. The Court is sympathetic to the fact that the Lankfords, like so many
other defendants, had no actual knowledge of the Ponzi scheme until Douglas Vaughan’s crimes
came to light. However, the “good faith defense ... [only] permits an innocent investor to retain
funds up to the amount of the initial outlay.” Wagner v. Eberhard, 2014 WL 271632, *5
(Bankr.D.N.M. 2014) (quoting Donell v. Kowell, 533 F.3d 762, 771 (9th Cir.2008)).10 The
defense does not prevent a trustee from recovering fictitious profits paid pursuant to a Ponzi
9 Section 548(c) provides, in relevant part: “a transferee ... that takes for value and in good faith has a lien
on or may retain any interest transferred ... to the extent that such transferee or obligee gave value to the
debtor in exchange for such transfer or obligation.” 11 U.S.C. § 548(c). The UFTA provides: “[a]
transfer or obligation is not voidable ... against a person who took in good faith and for a reasonably
equivalent value.” N.M.S.A. 56-10-22(A).
10 See also Perkins v. Haines, 661 F.3d 623, 627 (11th Cir. 2011) (holding that the good faith defense
under Section 548(c) can only protect Ponzi investors to the extent of their original investment);
Securities Investor Protection Corp. v. Bernard L. Madoff Inv. Securities LLC, 499 B.R. 416, 422-426
(S.D.N.Y. 2013) (concluding that for purposes of Section 548(c), investors only give “value” to the extent
of their original investment); In re Maui Indus. Loan & Finance Co., Inc., 2013 WL 2897792, *6
(D.Hawaii 2013) (noting that the “good faith defense … permits an innocent winning investor to retain
funds up to the amount of the initial outlay”); In re LLS America, LLC, 2013 WL 3305393, *14
(Bankr.E.D.Wash. 2013) (same).
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scheme. Id. By her Motions, the Trustee only seeks to recover Net Winnings. The Court
therefore cannot consider whether the Lankfords acted in good faith, how much they actually
knew, or the circumstances surrounding their investments for purposes of this ruling.
The Lankfords also attempt to defeat summary judgment by complaining about various
arithmetic errors made by the Trustee. In their statement of material facts11 and in the discussion
section of their briefs, the Lankfords argue that the Trustee miscalculated the amounts they
received during both the two and four year look-back periods. They also contend that the
Trustee overstated the amount VCR paid to the Lankfords, jointly, by $4,037.24 after relying on
inaccurate spreadsheets reflecting 1099 interest disclosures. Assuming such facts are true, they
do not change the result of this ruling. The Trustee is not seeking a judgment for the entire
amount VCR transferred to the Lankfords during either the two or four years preceding the
Petition Date. The parties’ disagreement over those amounts is therefore irrelevant. With
respect to the Lankfords’ assertions that the Trustee initially overstated the amounts paid to them
by $4,037.24, the Trustee admits as much and has adjusted her calculations accordingly. The
Motions for Summary Judgment reflect the updated calculations, and the Court did not rely on
the overstated amount in connection with this ruling. Instead, it relied on numbers to which all
parties agree (i.e. the amounts invested by the Defendants and the amounts transferred by VCR)
to independently calculate the Net Winnings. Thus, to the extent the Trustee’s calculations were
initially incorrect, such error has not tainted this ruling.
Finally, the Lankfords point to various ways in which the Trustee has allegedly abused
her position. They contend, for example, that the Trustee withheld evidence relating to the 1099
spreadsheets. The 1099 spreadsheets, which formed the basis for the Trustee’s initial
11 The Court considered the arguments set forth in the Lankfords’ separate statement of material facts, but
it did not deem such facts established. For the most part, the facts were not supported by admissible
evidence. Even if the Court considered them, however, they would not have changed the result here.
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calculations, are not pertinent to the Court’s ruling here. As explained above, the Court relied on
the Lankfords’ own admissions to calculate the Net Winnings. In addition, there has been no
indication that the Trustee or her counsel acted with any nefarious or dishonest motives during
the course of this case. The Lankfords also appear to contend that the Trustee violated the
applicable statute of limitations and that she intentionally submitted shoddy evidence to the
Court just before the limitations period expired. This argument is not well taken. The UFTA, in
conjunction with 11 U.S.C. § 544(b), allows a trustee to void fraudulent transfers that occurred
within four years before commencement of the bankruptcy case. See N.M.S.A.1978 § 56-10-23.
A trustee must generally commence the fraudulent transfer litigation within the later of two years
after the Petition Date or one year after he or she is appointed. See 11 U.S.C. § 546(a). Here, the
Trustee is only seeking to recover Net Winnings that were paid during the four year look-back
period. Further, she commenced the case within two years of the Petition Date using the
available evidence at the time. The Trustee’s claims are therefore not time-barred.
The Lankfords, like most innocent investors who unwittingly participated in VCR’s
Ponzi scheme, are clearly frustrated and upset by the fraudulent transfer litigation. While the
Court certainly appreciates their frustration, the Lankfords cannot keep their gains at the expense
of other investors who lost everything.
The Trustee has established all elements of her claims to recover the Net Winnings VCR
paid to the Lankfords, jointly, and David Lankford, individually, under 11 U.S.C. § 548(a)(1)(B)
and N.M.S.A. 1978 § 56-10-18(A)(2). As discussed above, the asserted defenses will not
prevent the Trustee from recovering the Net Winnings. The Trustee is therefore entitled to
judgment in her favor against the Lankfords, jointly, in the amount of $45,939.32, and David
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Lankford, individually, in the amount of $21,465.07, plus post-judgment interest at the federal
judgment rate.
CONCLUSION
Based on the foregoing, the Trustee’s Motions for Summary Judgment will be granted.
The Trustee is entitled to avoid and recover all Net Winnings transferred to the Defendants. The
Court will enter a separate judgment consistent with this memorandum opinion.
________________________________
ROBERT H. JACOBVITZ
United States Bankruptcy Judge
Date entered on docket: May 27, 2014
COPY TO:
James Askew, Edward Mazel, & Daniel White
320 Gold Ave S.W., Suite 300A
Albuquerque, NM 87102
David Lankford and Lee Ann Lankford
4243 E. Montgomery Rd
Cave Creek, AZ 85331
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