Wagner v. Ultima Homes, Inc. et al

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. 12-01110
ULTIMA HOMES, INC.,
KENNETH HIGHTOWER, as trustee of the
Ultima Homes, Inc. Defined Benefit Plan and
Trust, JOHN DOE, as trustee of the Ultima Homes,
Inc. Defined Benefit Plan and Trust,
Defendants.
MEMORANDUM OPINION
THIS MATTER is before the Court on the Defendants’ Motion for Summary Judgment
(“Motion for Summary Judgment”).1 See Docket Nos. 18, 19, and 23. Plaintiff Judith Wagner,
Chapter 11 Trustee of the bankruptcy estate of the Vaughan Company Realtors (the “Trustee”),
filed a response and a supplemental response in opposition to the Motion for Summary
Judgment. See Docket Nos. 16, 20, and 33. This adversary proceeding is one of many adversary
proceedings initiated by the Trustee seeking to recover payments made by Vaughan Company
1 The Defendants originally filed a motion to dismiss the adversary proceeding, in which they asserted
facts that were not part of the complaint. See Docket Nos. 6 and 7. The Defendants converted the motion
to dismiss into a motion for summary judgment but failed to include a statement of undisputed facts. See
Docket Nos. 18, 19. However, the Defendants’ reply in support of their motion for summary judgment
included such a statement. See Docket No. 23. Because the Trustee had an opportunity to file a sur-
reply, see Docket No. 33, the Court considered the statement of material undisputed facts set forth in the
Defendants’ reply. Consequently, when the Court references the “Motion for Summary Judgment,” this
includes both the motion for summary judgment and the reply (Docket Nos. 18, 19, and 23).
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Realtors (“VCR”) to parties who invested in VCR’s promissory note program. The Trustee
asserts that VCR operated its business as a Ponzi scheme. She seeks to recover certain transfers
made to Defendants under several theories, including avoidance of transfers under the actual
fraud and constructive fraud provisions of 11 U.S.C. § 548 and applicable state law.
After consideration of the Motion for Summary Judgment, the responses thereto, and the
supporting papers, and being otherwise sufficiently informed, the Court finds that the Motion for
Summary Judgment should be granted as to the Trustee’s claims for turnover (Count 1) and
denied as to all remaining claims.
SUMMARY JUDGMENT STANDARDS
Summary judgment, governed by Rule 56, Fed.R.Civ.P., 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 Rule 7056, Fed.R.Bankr.P. “[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). The party seeking summary judgment must
set forth by number all material facts the movant contends are not subject to genuine dispute, and
refer with particularity to the portions in the record upon which the movant relies. NM LBR
7056-1(b). 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)).
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“[A] party opposing a properly supported motion for summary judgment may not rest on
mere allegation 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). Furthermore, New
Mexico Local Bankruptcy Rule 7056–1(c) provides that the party opposing summary judgment
must: 1) list the material facts as to which the party contends a genuine fact exists; 2) “refer with
particularity to those portions of the record upon which the opposing party relies;” and 3) “state
the number of the movant’s fact that is disputed.” NM LBR 7056-1(c). Properly supported
material facts set forth by the moving party are “deemed admitted unless specifically
controverted” by the party opposing summary judgment. NM LBR 7056-1(c).
COUNTS CONTAINED IN THE COMPLAINT
The Complaint contains ninety numbered paragraphs and consists of nine separate
counts. Paragraphs 1 through 52 include allegations regarding the nature of the proceeding,
jurisdiction and venue, the alleged transfers, and the fraudulent Ponzi scheme allegedly
perpetrated by Douglas Vaughan and his company, VCR. Paragraphs 53 through 90 incorporate
paragraphs 1 through 52 by reference and set forth each claim as a separate count. The counts
are:
Count 1 Turnover and Accounting under 11 U.S.C. § 542
Count 2 Actual Fraud under 11 U.S.C. § 548(a)(1)(A) based on alleged transfers to
the Defendants made within two years of the date of the filing of the VCR
bankruptcy case
Count 3 Constructive Fraud under 11 U.S.C. § 548(a)(1)(B) based on alleged
transfers to the Defendants made within two years of the date of the filing
of the VCR bankruptcy case
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Count 4 Actual Fraud under state law, N.M.S.A. § 56-10-18(A)(1) based on
alleged transfers to the Defendants made within four years of the date of
the filing of the VCR bankruptcy case
Count 5 Constructive Fraud under state law, N.M.S.A. § 56-10-18(A)(2) based on
alleged transfers to the Defendants made within four years of the date of
the filing of the VCR bankruptcy case
Count 6 Fraudulent transfer (present creditors) under state law, N.M.S.A. § 56-10-
19(A) and/or 11 U.S.C. § 544 as to the Defendants
Count 7 Fraudulent transfer (past creditors) under state law, N.M.S.A. §56-10-
19(B) and/or 11 U.S.C. § 544 as to the Defendants
Count 8 Undiscovered fraudulent transfers based on state law
Count 9 Disallowance of the Defendants’ Claims under 11 U.S.C. § 502(d), or,
alternatively, Equitable Subordination of her Claims under 11 U.S.C. §
510(c)
FACTS NOT SUBJECT TO DISPUTE
The following facts are not subject to genuine dispute:2
1. Ultima Homes, Inc. (“Ultima Homes”) maintains a Defined Benefit Pension Plan
and Trust (the “Ultima Plan”). See generally Defendants’ Reply in Support of Motion for
Summary Judgment and Memorandum in Support Thereof (Docket No. 23) (“Defendants’
Reply”), ¶ 1; Trustee’s Sur-Response in Opposition to Defendants’ Reply in Support of Motion
for Summary Judgment and Memorandum in Support Thereof (Docket No. 33) (“Trustee’s Sur-
Reply”), p. 6.
2. Jon K. Hightower is the trustee of the Ultima Plan. See Defendants’ Reply, ¶ 3;
Trustee’s Sur-Reply, p. 7.
2 The Defendants refer to additional facts throughout their briefs. However, because NM LBR 7056–1(b)
requires the movant to include a numbered list of the material facts to which they contend no genuine
dispute exists, the Court limited its consideration of facts to those enumerated in the Defendants’
statement of uncontested material facts. See Docket No. 23, p. 2-3. The Court will not consider facts
contained in affidavit testimony that are unrelated to the facts set forth in the Defendants’ statement of
material facts.
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3. Ultima Homes and the Ultima Plan maintain separate bank accounts.3 See
Defendants’ Reply, ¶ 4; Hightower Affidavit, ¶ 24. Funds belonging to Ultima Homes were kept
separate from funds belonging to the Ultima Plan.4 Id. at ¶ 10; ¶¶ 24-25
4. Ultima Homes entered into a contract with Douglas Vaughan in his personal
capacity for the construction of Mr. Vaughan’s personal residence. See Defendants’ Reply, ¶ 11;
Trustee’s Sur-Reply, p. 8.
5. Ultima Homes had access to information pertaining to Mr. Vaughan’s personal
financial situation in 2003 and 2004, including information about loans for which Mr. Vaughan
had been approved. See Defendants’ Reply, ¶ 12; Trustee’s Sur-Reply, p. 8.
6. From 2004 through 2009, the Ultima Plan invested a total of $100,000 into VCR's
promissory note program with a promised rate of return of 16% per annum. See Complaint
(Docket No. 1), ¶¶ 31-32; Defendants’ Answer to Complaint (Docket No. 5) (“Answer”), ¶ 31-
32; Defendants’ Reply, ¶¶ 5-7, 13; Trustee’s Sur-Reply, p. 7-8.
7. The investments were evidenced by one or more promissory notes executed by
VCR in favor of the Ultima Plan. See Complaint, ¶ 34; Answer, ¶ 34.
8. VCR made periodic payments to the Ultima Plan in connection with VCR’s
promissory note program. See Defendants’ Reply, ¶ 6; Trustee’s Sur-Reply, p. 7. All such
payments were made directly to the Ultima Plan and deposited into a bank account for the
Ultima Plan. See Defendants’ Reply, ¶ 8; Trustee’s Sur-Reply, p. 7; Hightower Affidavit at ¶ 24.
9. The Ultima Plan received at least $79,342.37 in payments from VCR. See
Defendants’ Reply, ¶ 13; Trustee’s Sur-Reply, p. 8.
3 Defendants also assert it is undisputed that the Ultima Plan is a separate entity from Ultima Homes.
Defendants have not supported his factual assertion with admissible evidence. However, for the purposes
of this opinion, the Court assumes this factual assertion to be true because it does not change the result.
4 Defendants use the phrase “intermingle,” which is a legal conclusion. The Court instead used the phrase
“kept separate,” which is consistent with the Defendants’ intent.
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10. Ultima Homes did not receive funds from VCR in connection with the note
program. See Defendants’ Reply, ¶ 9; Trustee’s Sur-Reply, p. 8.
DISCUSSION
The Trustee seeks to recover transfers made by VCR to the Defendants under 11 U.S.C.
§§ 544 and 548 and New Mexico’s version of the Uniform Fraudulent Transfer Act (“UFTA”).
The Trustee consents to the dismissal, without prejudice, of her claim for turnover based on 11
U.S.C. § 542.5 Accordingly, the Court will dismiss Count 1.
With respect to the remaining counts, the Defendants contend that they are entitled to
judgment in their favor because: (1) the Trustee lacks standing to sue under the Employee
Retirement Income Security Act (“ERISA”); (2) the Trustee is prohibited from recovering
transfers to the Ultima Plan under ERISA and the Internal Revenue Code (“IRC”); and (3) the
Defendants acted in good faith pursuant to N.M.S.A. § 56-10-22(A). The Defendants also
contend that Mr. Hightower and Ultima Homes are not proper parties to the suit because they did
not receive any transfers from VCR. As discussed below, the facts not in genuine dispute are
insufficient to demonstrate that the Defendants are entitled to judgment as a matter of law on
Counts 2 through 9.
5Generally, a trustee may not use the turnover provisions of 11 U.S.C. § 542 to recover a fraudulent
transfer because the fraudulently transferred property does not become property of the bankruptcy estate
until the transfer is avoided and recovered. See, e.g, In re Amcast Indus. Corp., 365 B.R. 91, 122
(Bankr.S.D.Ohio 2007) (recognizing that an action for turnover under § 542 “may be used to compel
turnover of estate property whose transfer from the estate has been avoided and ownership is no longer in
dispute[,]” but, in order to “state a claim for turnover, the plaintiff must allege that the transfer of funds
has already been avoided or that the property is otherwise the undisputed property of the estate.”)
(citations omitted); In re Teligent, Inc., 307 B.R. 744, 751 (Bankr.S.D.N.Y. 2004) (reasoning that,
because fraudulently transferred property does not become property of the estate until the property has
been recovered, “[t]he trustee cannot compel the turnover of non-estate property under 11 U.S.C. § 542,
and circumvent the more restrictive fraudulent transfer claim in the process.”).
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1. Whether the Trustee has standing to pursue her fraudulent transfer claims
As an initial matter, the Defendants contend that the Trustee lacks standing to sue the
Ultima Plan under ERISA. They argue that the only persons authorized to sue an ERISA-
qualified plan are: (1) a participant or beneficiary; (2) the Secretary of Labor; and (3) a fiduciary
of the plan. Section 502 of ERISA, 29 U.S.C. § 1132(a) enumerates the parties that are entitled
to maintain a civil claim under the statute. That section provides that a civil action may be
brought by a participant, a beneficiary, the Secretary of Labor, a fiduciary, an employer, or a
person referred to in 29 U.S.C. § 1021 for specified purposes, such as to enforce provisions of an
ERISA plan or assert a violation of ERISA. 29 U.S.C. § 1132(a).
The Court cannot determine whether the Ultima Plan is an ERISA-qualified plan in the
context of the Motion for Summary Judgment. The Defendants have failed to establish facts,
supported by evidence, which would permit the Court to reach that conclusion. However, even if
the Ultima Plan were ERISA-qualified, Section 502 of ERISA would not prevent the Trustee
from pursuing her claims. It is undisputed that the Trustee is not a participant, beneficiary,
fiduciary, or employer associated with the Ultima Plan. Nevertheless, the Trustee is not seeking
to bring an action or enforce any rights under ERISA. Instead, the Trustee is asserting claims for
fraudulent transfer under the Bankruptcy Code and the UFTA. Section 502 of ERISA places
limits on a claimant’s ability to bring a civil action that seeks certain types of relief. Since the
Trustee is not seeking the type of relief specified in the statute, Section 502 of ERISA is
inapplicable to the Trustee’s claims. See generally Cob Clearinghouse Corp. v. Aetna U.S.
Healthcare, Inc. 362 F.3d 877, 882 (6th Cir. 2004) (plaintiff did not have standing under 29
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U.S.C. § 1132(a) to “maintain an ERISA claim” because it was not a participant, beneficiary, or
fiduciary of an ERISA plan) (emphasis added).6
The Court concludes that the Trustee has standing to seek to recover transfers to the
Ultima Plan under 11 U.S.C. §§ 544 and 548 and applicable state law.7 The Court will deny the
Motion for Summary Judgment to the extent that it seeks a determination that ERISA precludes
the Trustee from seeking to avoid fraudulent transfers to the Ultima Plan.
2. Whether ERISA’s anti-alienation provision bars the Trustee’s fraudulent transfer
claims
The Defendants contend that Section 206 of ERISA, 29 U.S.C. § 1056(d)(1) and the IRC,
26 U.S.C. § 401(a)(13) prohibit the Trustee from recovering transfers to the Ultima Plan. As
discussed above, it is unclear whether the Ultima Plan is a qualified plan under ERISA.
However, even if the Ultima Plan were ERISA qualified, the Court is not persuaded that
ERISA’s anti-alienation provision bars the Trustee’s claims.
ERISA contains a number of provisions directed at safeguarding a stream of income for
pensioners and their dependents. See generally Guidry v. Sheet Metal Workers Nat. Pension
Fund, 493 U.S. 365, 376, 110 S.Ct. 680, 107 L.Ed.2d 782 (1990). Section 206 of ERISA, 29
U.S.C. § 1056(d)(1) mandates that “[e]ach pension plan shall provide that benefits provided
under the plan may not be assigned or alienated.” This section is known as the “anti-alienation
provision.” The coordinate section of the IRC contains similar restrictions, providing that “[a]
6 See also Pentech Infusions, Inc. v. Anthem Health Plans of Kentucky, Inc., 387 F.Supp.2d 712, 714
(W.D.Ky. 2005) (noting that “only a participant in an ERISA plan or a beneficiary may enforce rights
under such a plan”) (emphasis added); International Union of Bricklayers and Allied Craftsmen v.
Gallante, 938 F.Supp. 196, 200-201 (S.D.N.Y. 1996) (analyzing whether trustee had standing pursuant to
29 U.S.C. § 1132(a) to assert claims under ERISA); Cohen v. Independence Blue Cross, 820 F.Supp.2d
594, 603 (D.N.J. 2011) (“[U]nder ERISA's civil enforcement provision, only participants and
beneficiaries have standing to bring a lawsuit.”).
7 The Court confines its ruling on standing to the Defendants’ contention that the Trustee lacks standing
under Section 502 of ERISA, 29 U.S.C. § 1132(a).
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trust shall not constitute a qualified trust under this section unless the plan of which such trust is
a part provides that benefits provided under the plan may not be assigned or alienated.” 26
U.S.C. § 401(a)(13).
In general, the anti-alienation provision prohibits creditors from reaching funds in an
ERISA plan as a means of collecting a judgment against a beneficiary. Guidry v. Sheet Metal
Workers Nat. Pension Fund, 493 U.S. 365, 372, 110 S.Ct. 680, 107 L.Ed.2d 782 (1990)
(ERISA's anti-alienation provision prohibits garnishment of a qualified pension plan “unless
some exception to the general statutory ban is applicable.”).8 The provision has been interpreted
to exclude a debtor’s interest in pension benefits from the bankruptcy estate. See Patterson v.
Shumate, 504 U.S. 753, 765, 112 S.Ct. 2242, 119 L.Ed.2d 519 (1992) (under ERISA’s anti-
alienation provision, “a debtor's interest in an ERISA-qualified pension plan may be excluded
from the property of the bankruptcy estate pursuant to § 541(c)(2)[.]”).9 A bankruptcy trustee
may therefore not access a debtor’s interest in an ERISA plan while the funds are being held by
the plan. See In re Kunz, 2005 WL 165447, *1 (10th Cir. Jan, 26, 2005) (noting that a Chapter 7
trustee may not exercise control over the debtor’s interest in a qualified-ERISA plan).
Courts are highly skeptical of creating exceptions to ERISA’s anti-alienation provision.
See Patterson, 504 U.S. at 760 (In construing ERISA's anti-alienation provision, courts have
“vigorously ... enforced ERISA's prohibition on the assignment or alienation of pension benefits,
declining to recognize any implied exceptions to the broad statutory bar.”). However, creditors
or other parties may reach pension benefits if permitted to do so by certain federal statutes. For
example, the IRS is permitted to collect a plan participant’s ERISA benefits to satisfy the plan
8 See also Effect of anti-alienation provisions of [ERISA] on rights of judgment creditors, 131 A.L.R. Fed.
427 (1996).
9 See also In re Reinhart, 2012 WL 1409284, *5 (10th Cir. Apr. 24, 2012 (discussing the general rule that
retirement funds held in ERISA plans are generally not included in the bankruptcy estate); U.S. I.R.S. v.
Synder, 343 F.3d 1171, 1174 -1177 (9th Cir. 2003) (same).
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participant’s outstanding tax liabilities. See 26 U.S.C. § 6331(a), (c) (the IRS is authorized to
levy upon all property belonging to the taxpayer, and no other federal law shall exempt property
from the IRS's reach). Courts have also recognized that a creditor may reach a plan participant’s
ERISA benefits pursuant to a criminal restitution order. See, e.g., United States v. Irving, 452
F.3d 110, 126 (2d Cir.2006) (“ERISA pension plans are not exempted from payment of taxes
under 26 U.S.C. § 6334, and thus they should not be exempted from payment of criminal
fines.”).10
The Trustee urges the Court to recognize an exception to the anti-alienation provision
that would allow her to recover fraudulent transfers under the Bankruptcy Code and applicable
state law. The initial inquiry, however, is whether the recovery of a fraudulent transfer
constitutes an alienation or assignment prohibited by Section 206 of ERISA and the IRC. The
IRC regulations promulgated by the Secretary of Treasury, who has the authority to implement
ERISA, define the terms “assignment” and “alienation.” Those regulations, which are entitled to
deference under Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837, 844, 104
S.Ct. 2778, 81 L.Ed.2d 694 (1984), provide:
For purposes of this section, the terms “assignment” and “alienation” include --
(i) Any arrangement providing for the payment to the employer of plan benefits
which otherwise would be due the participant under the plan, and
(ii) Any direct or indirect arrangement (whether revocable or irrevocable)
whereby a party acquires from a participant or beneficiary a right or interest
enforceable against the plan in, or to, all or any part of a plan benefit payment
which is, or may become, payable to the participant or beneficiary.
26 C.F.R. § 1.401(a)-13(c)(1) (emphasis added).
10 See also United States v. Novak, 441 F.3d 819, 824 (9th Cir.2006) (“In … providing for the
enforcement of restitution orders through 18 U.S.C. § 3613, Congress … has created a statutory exception
to ERISA's anti-alienation provision.”); U.S. v. First Bank & Trust East Texas, 588 F.Supp.2d 736, 739
(E.D.Tex. 2007) (“Congress, in enacting the [Mandatory Victim Restitution Act of 1996], made a
considered policy decision to create an exception to the general statutory ban on alienation of ERISA-
qualified benefits.”).
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On its face, Section 206 of ERISA only restricts alienation of “benefits provided under
the plan.” 29 U.S.C. § 1056(d)(1). When read in conjunction with the coordinate IRC
regulations, it is clear that recapturing a fraudulent transfer does not constitute an “assignment”
or “alienation” prohibited by ERISA. Subpart (i) requires that the payment be made to an
employer. The Trustee is not an employer, and subpart (i) is therefore inapplicable. Subpart (ii)
requires that an enforceable right be obtained from a participant or beneficiary, not from the plan
itself. Mr. Hightower contracted with VCR as trustee and on behalf on the Ultima Plan. There is
no evidence that Mr. Hightower acted in his capacity as a beneficiary or participant; on the
contrary, the Defendants contend that at all times Mr. Hightower acted in his capacity as trustee
of the Ultima Plan. See Defendants’ Memorandum in Support of Motion for Summary Judgment
(Docket No. 18). Thus, subpart (ii) is also inapplicable.
Several courts have examined 29 U.S.C. § 1056(d)(1) and the accompanying IRC
regulations to determine whether a particular transaction constituted an assignment or alienation
within the meaning of ERISA. In In re Schantz, 221 B.R. 653 (N.D.N.Y. 1998), for example, the
court determined that the anti-alienation provision did not prohibit a trustee from pledging plan
assets. The court reasoned that the provision is “restricted to the alienation of the legal right of
the beneficiary to receive benefits, a right which is independent of the trustee's ownership of
those benefits. The pledging of a trust asset would not alter a beneficiary's legal right to receive
benefits….” Id. Similarly, the court in O'Toole v. Arlington Trust Co., 681 F.2d 94 (1st
Cir.1982) found that a bank, which had used the deposited assets of a trust to offset the trustees'
outstanding loans, was not subject to ERISA's anti-alienation provision. The court noted that:
The prohibition [on alienation] is directed at ‘benefits provided,’ not the corpus of the
fund; and the potential for assignment or alienation, which is limited by the prohibition,
would seem to lie with the beneficiary, not the depository. … We would be hard-pressed
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to find that § 1056(d) was intended to do more than address the individual beneficiary's
right of access to his share of the fund.
Id. at 96.11 Because the anti-alienation provision only prohibits alienation of benefits to become
payable to a plan participant or beneficiary, those provisions do not limit the Trustee’s right to
recover fraudulent transfers from the corpus of the Ultima Plan.
In addition, the anti-alienation provision, even if otherwise applicable, does not supersede
the avoidance provisions of the Bankruptcy Code. ERISA must be read in harmony with 11
U.S.C. §§ 544 and 548. See U.S. v. Wampler, 624 F.3d 1330, 1336 (10th Cir. 2010) (citing the
“familiar principle of statutory construction that, when possible, courts should construe statutes
… to foster harmony with other statutory and constitutional law”) (internal citations omitted).12
ERISA explicitly states “[n]othing in this subchapter shall be construed to alter, amend, modify,
invalidate, impair, or supersede any law of the United States.” 29 U.S.C. § 1144(d). Thus,
ERISA can be read to prohibit the alienation of plan benefits except as otherwise provided for by
federal law.
Although only a handful of courts have examined this issue, the majority permitted
bankruptcy trustees to use the avoiding powers of 11 U.S.C. §§ 547 and 548 to recover from
ERISA plans. For example, In re Goldschein, 241 B.R. 370, 379 (Bankr.D.Md. 1999) held that
while “the anti-alienation provision[] protects a beneficiary's interest in legitimate Plan assets
from collection .. by creditors,” it does “not preclude the avoidance of fraudulent transfers.” In
handing down a similar ruling, the court in In re CF & I Fabricators of Utah Inc., 163 B.R. 858,
878 (Bankr.D.Utah 1994) noted that “[t]o rule otherwise would provide a windfall to the ...
11 See also Medical University Hosp. Authority v. Oceana Resorts, LLC, 2012 WL 683938, *5 (D.S.C.
Mar. 2, 2012) (“An arrangement whereby the Plan sets up a default payment structure to provide
payments to a medical provider [did] not constitute an assignment [or alienation]” within the meaning of
26 C.F.R. § 1.401(a)-13 or ERISA).
12 See also Sutherland, Statutory Construction, § 51.02 (Sands 4th ed. 1984) (“Statutes for the same
subject, although in apparent conflict, are construed to be in harmony if reasonably possible.”).
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Benefit Plan at the expense of [the debtor’s] creditors.” See also Velis v. Kardanis, 949 F.2d 78,
82 (3rd Cir.1991) (noting that “Congress intended to provide protection against the claims of
creditors for a person's interest in pension plans, unless vulnerable to challenge as fraudulent
conveyances or voidable preferences.”) (emphasis added); In re Key Communications, Inc., 994
WL 242643, *1 (5th Cir. 1994) (noting that the appellant cited “no authority for the proposition
that pension plans can serve as safe harbors for fraudulent conveyances or voidable transfers”).
The Court concludes that the application of the Bankruptcy Code’s provisions voiding
fraudulent transfers does not conflict with the identified purposes of ERISA’s anti-alienation
provision. The Bankruptcy Code is directed at the prevention of debtor fraud, while ERISA is
aimed at protecting employees “from … [their] own financial improvidence in dealing with third
parties.” American Telephone & Telegraph Co. v. Merry, 592 F.2d 118, 124 (2d Cir.1979). To
hold otherwise would subordinate the Bankruptcy Code to ERISA, which contravenes ERISA’s
express directive that it not be construed to supersede any other federal law. See 29 U.S.C. §
1144(d).
The Defendants are therefore not entitled to judgment in their favor on the basis that
ERISA’s anti-alienation provision prohibits the Trustee from pursuing her fraudulent transfer
claims.
3. Whether ERISA’s exclusive benefit rule bars the Trustee’s fraudulent transfer claims
Defendants also contend that the Trustee is prohibited from recovering transfers to the
Ultima Plan pursuant to Section 403 of ERISA, 29 U.S.C. § 1103(c)(1), which sets forth the
general rule regarding the use of pension plan assets. Known as the “exclusive benefit rule” or
the “anti-inurement provision,” that section states, in pertinent part:
Except as provided in paragraph (2), (3), or (4) or subsection (d) of this section, or under
sections 1342 and 1344 of this title (relating to termination of insured plans), …the assets
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of a plan shall never inure to the benefit of any employer and shall be held for the
exclusive purposes of providing benefits to participants in the plan and their beneficiaries
and defraying reasonable expenses of administering the plan.
29 U.S.C. § 1103(c)(1).
The exclusive benefit rule requires a trustee of a retirement plan to hold all assets in trust
for the benefit of the employees. See generally 29 U.S.C. § 1103, titled “Establishment of a
Trust.”13 The rule “is intended to protect participants' expected payments by preventing
employers from diverting funds to themselves.” Maez v. Mountain States Tel. and Tel., Inc., 54
F.3d 1488, 1506 (10th Cir. 1995).14 It also addresses the conditions under which residual assets
of an ERISA plan may be retained by an employer or plan sponsor. See Outzen v. FDIC ex rel.
State Examiner of Banks, 948 F.2d 1184, 1188 (10th Cir.1991) (discussing whether the exclusive
benefit rule prohibited a plan sponsor from retaining surplus funds upon termination of the
plan).15
By its terms, Section 403 of ERISA relates only to the purposes for which plan assets are
held and the fiduciary's conduct in managing those assets. In Hughes Aircraft v. Jacobson, 525
U.S. 432, 441-42, 119 S.Ct. 755, 142 L.Ed.2d 881 (1999), the Supreme Court noted that the
exclusive benefit rule “focuses exclusively on whether fund assets were used to pay pension
benefits to plan participants ...” The Supreme Court went on to hold that because the plaintiffs in
that case “d[id] not allege that [the trustee] used any of the assets for a purpose other than to pay
its obligations to the Plan's beneficiaries, [he] could not have violated the anti-inurement
13 See also Johnson v. Couturier, 572 F.3d 1067, 1076-1077 (9th Cir. 2009) (noting that 29 U.S.C. § 1103
“requires that plan assets be held in trust for the exclusive benefit of plan participants and their
beneficiaries”).
14 See also Hawkeye Nat. Life Ins. Co. v. AVIS Indus. Corp., 122 F.3d 490, 497 (8th Cir. 1997) (The
exclusive benefit rule “widely proscribes the distribution of plan assets to employers.”).
15 See also Resolution Trust Corp. v. Financial Institutions Retirement Fund, 71 F.3d 1553, 1557 (10th
Cir. 1995) (finding that a receiver could not retain surplus plan benefits and noting that the exclusive
benefit rule is “violated if there has been a removal of plan assets for the benefit of the plan sponsor or
anyone other than the plan participants.”).
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provision” under § 403(c).” Id. More recently, the Supreme Court reiterated that Section 403 of
ERISA “demands only that plan assets be held for supplying benefits to plan participants.”
Raymond B. Yates, M.D., P.C. Profit Sharing Plan v. Hendon, 541 U.S. 1, 124 S.Ct. 1330, 1344,
158 L.Ed.2d 40 (2004).
The Defendants contend that the exclusive benefit rule defeats any recovery of fraudulent
transfers against the Ultima Plan. However, there is a difference between one party’s duty to
hold assets in trust and another party’s ability to reach them. Although Section 503 of ERISA
governs the way in which employers may utilize plan assets, it does not address the rights of a
third party to access those assets.16 The rights of a third party to access plan assets is governed
by the anti-alienation provision contained in Section 206 of ERISA, which, as discussed above,
does not apply to the Trustee’s fraudulent transfer claims. Here, there is no evidence that Mr.
Hightower used the assets of the Ultima Plan for any purpose other than providing benefits and
defraying reasonable expenses. Whether Mr. Hightower acted appropriately in investing
retirement funds in the VCR note program is not at issue in this case. What is at issue – whether
the Trustee can recover fraudulent transfers from the Ultima Plan – is not within the scope of
Section 403(c)(1) of ERISA.
The Court concludes that the exclusive benefit rule is not applicable to the Trustee’s
claims. The Defendants are therefore not entitled to judgment in their favor on that basis.
4. Whether the good faith defense under N.M.S.A.1978 § 56-10-22(A) bars the Trustee’s
fraudulent transfer claims
Next, the Defendants contend that they are entitled to judgment in their favor because
they are entitled to the protections of the UFTA, N.M.S.A.1978 § 56-10-22(A). The UFTA
16 See, e.g., Maez, 54 F.3d at 1506 (noting that the exclusive benefit rule did not require the return of plan
assets where Plaintiffs did not allege any “reversion, diversion, or any other sort of payment of surplus
assets to [the plan administrators]”).
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provides a safe harbor for transferees who received an otherwise avoidable transfer in good faith
and for a reasonably equivalent value. Section 56-10-22(a) of the UFTA provides:
A transfer or obligation is not voidable under Paragraph (1) of Subsection A of Section 5
of the Uniform Fraudulent Transfer Act [N.M.S.A. 1978 § 56-10-18] against a person
who took in good faith and for a reasonably equivalent value or against any subsequent
transferee or obligee.
N.M.S.A.1978 § 56-10-22(A).
The UFTA does not define good faith, nor does the case law applying N.M.S.A.1978 §
56-10-22(A). However, the language of 11 U.S.C. § 548(c) - the Bankruptcy Code’s good faith
provision - is very similar to the UFTA. Section 548(c) of the Bankruptcy Code provides:
Except to the extent that a transfer or obligation voidable under this section is
voidable under section 544, 545, or 547 of this title, a transferee or obligee of
such a transfer or obligation that takes for value and in good faith has a lien on or
may retain any interest transferred or may enforce any obligation incurred, as the
case may be, 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). Under both the UFTA and Section 548(c) of the Bankruptcy Code, the
transferee bears the burden of establishing good faith. In re Jones, 184 B.R. 377, 388
(Bankr.D.N.M. 1995) (The [transferees] bear the burden of proof under …[N.M.S.A.1978 § 56-
10-22(A)].”); In re M & L Business Mach. Co., Inc., 84 F.3d 1330, 1338 (10th Cir. 1996)
(“Under § 548(c), [the transferee] has the burden of establishing good faith.”). Further,
considering the similarities between Section 548(c) and the UFTA, “many courts have concluded
that … the same [good faith] analysis applies under both laws.” In re Tiger Petroleum Co., 319
B.R. 225, 232 (Bankr.N.D.Okla.2004).17 This Court agrees.18
17 See also In re Grandote Country Club Company, Ltd., 252 F.3d 1146, 1152 (10th Cir.2001) (noting the
similarities between the Colorado Uniform Fraudulent Transfer Act and 11 U.S.C. § 548); In re
Agricultural Research and Technology Group, Inc., 916 F.2d 528, 535 (9th Cir. 1990) (good faith under
11 U.S.C. § 548(c) is the equivalent of good faith under the Hawaii fraudulent transfer statute); In re
Spatz, 222 B.R. 157, 164 (N.D.Ill.1998) (“Because the provisions of the UFTA parallel § 548 of the
Bankruptcy Code, findings made under the Bankruptcy Code are applicable to actions under the
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In the Tenth Circuit, “good faith under [11 U.S.C.] § 548(c) should be measured
objectively.” M & L Business Mach. Co., 84 F.3d 1330, 1338 (10th Cir. 1996). Determining
whether a transferee has established good faith under Section 548(c) requires a two-part inquiry:
the Court must determine whether the “circumstances would place a reasonable person on
inquiry of a debtor's fraudulent purpose,” and if so, whether “a diligent inquiry would have
discovered the fraudulent purpose.” Id.19 In applying the “reasonable person” standard, the
Court must take into account the transferee’s individual circumstances, including their
sophistication as an investor and whether they had actual knowledge of the fraud. See M & L
Business Mach. Co, 84 F.3d at 1338-39 (affirming the bankruptcy court’s application of the
standard to a “reasonably prudent investor in [the transferee’s] position.”).20
Whether a particular investor is entitled to the protections of the good faith defense is a
fact intensive inquiry. This is because “[g]ood faith is not susceptible of precise definition and is
determined on a case-by-case basis.” In re Armstrong, 285 F.3d 1092, 1096 (8th Cir. 2002)
UFTA.”); In re First Commercial Management Group, Inc., 279 B.R. 230, 240 (Bankr.N.D.Ill.2002)
(same).
18 Whether a different analysis would apply when the transferee is not the initial transferee is beyond the
scope of this opinion.
19 See also In re Bayou Group, LLC, 439 B.R. 284, 310-312 (S.D.N.Y. 2010), in which the court surveys
the case law and concludes:
The good faith test under Section 548(c) is generally presented as a two-step inquiry. The
first question typically posed is whether the transferee had information that put it on
inquiry notice that the transferor was insolvent or that the transfer might be made with a
fraudulent purpose. While the cases frequently cite either fraud or insolvency, these two
elements are consistently identified as the triggers for inquiry notice. The fraud or
insolvency predicate is set forth in countless cases . . . . Once a transferee has been put on
inquiry notice of either the transferor's possible insolvency or of the possibly fraudulent
purpose of the transfer, the transferee must satisfy a ‘diligent investigation’ requirement.
20 See also See Cathill v Greemark, LLC (In re World Vision Entertainment Inc., 275 B.R. 641. 659
(Bankr. M.D. Md. Fla. 2002) (a transferee with actual knowledge of the fraud cannot establish good faith
under Section 548(c)); In re Bayou Group, LLC., 439 B.R. at 314 (“[T]he issue is whether the alleged ‘red
flag’ information would have put a reasonably prudent institutional hedge fund investor on inquiry
notice.”) (emphasis in the original); Manhattan Inv. Fund Ltd., 397 B.R. 1, 23 (S.D.N.Y. 2007) (framing
the issue as “whether the information Bear Stearns learned would have caused a reasonable prime broker
in its position to investigate the matter further”) (emphasis added).
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(internal citations omitted).21 Courts apply certain factors to determine whether a transferee has
established good faith under 11 U.S.C. § 548(c), including: (1) the transferee’s state of mind,
including whether he or she had actual or inquiry knowledge of the fraudulent scheme;22 (2)
whether the investor received exorbitant returns and/or was promised an interest rate greatly
exceeding any standard market rates;23 (3) how the investor was enticed to make the investment,
including how the investment was marketed;24 (4) whether the transfers occurred at arm’s length,
and more specifically, and how the investor became aware of or affiliated with the debtor;25 (5)
the individual investor’s education and sophistication;26 (6) the size of the investment;27 (7) any
prior business dealings between the transferor and transferee, including whether the payment was
late or made by any unusual method;28 and (8) whether there existed any other red flags that the
investment may not be legitimate.29 Many of these factors are relevant to both steps in the two-
21 See also M & L Business Mach. Co., 84 F.3d at 1335 (“Courts have been candid in acknowledging that
good faith is not susceptible of precise definition.”) (internal quotations omitted); For Your Ease Only,
Inc. v. Calgon Carbon Corp., 560 F.3d 717, 721 (7th Cir. 2009) (noting that a precise definition of good
faith is hard to come by); In re Roco Corp., 701 F.2d 978, 984 (1st Cir.1983) (same).
22 See, e.g., In re Bayou Grp., LLC, 439 B.R. 284, 314 (S.D.N.Y. 2010) (noting that courts must examine
whether investors had knowledge of any red flags that put the investor on inquiry notice).
23 See, e.g., In re M & L Bus. Mach. Co., Inc., 160 B.R. 851, 859 (Bankr. D.Colo. 1993) (Ponzi-scheme
investor did not act in good faith in pursuing a risk-free investment producing profits up to 512 %); In re
Agricultural Research and Technology Group, Inc., 916 F.2d 528, 539 (9th Cir. 1990) (investor did not act
in good faith where the value received was grossly in excess of the initial investment).
24 See, e.g., In re M &L Business Mach Co., Inc., 198 B.R. 800, 810 (D.Colo. 1996) (citing the lack of
written financial information or prospectuses of the type normally provided as evidence that the transferee
did not act in good faith).
25 See, e.g., In re Hannover Corp., 310 F.3d 796, 800-801 (5th Cir. 2002) (determining that the good faith
defense applied where investors were unaffiliated with the debtor and negotiated an arm’s length
transaction).
26 See, e.g., In re M &L Business Mach Co., Inc., 198 B.R. at 810 (affirming bankruptcy court’s
application of various factors under Section 548(c) including investor’s education and experience).
27 See, e.g., In re CEP Holdings, Inc., 2010 WL 2036949, *6 (Bankr.N.D.Ga. 2010) (rejecting the good
faith defense where defendants received extraordinary profits on relatively small investments).
28 See, e.g., In re M&L Business Mach. Co., Inc., 84 F.3d 1330, 1338 (10th Cir. 1996) (affirming
bankruptcy court’s finding that the transferee did not act in good faith where the debtor used postdated
checks to pay transfers ); In re Ponzi, 4 F.2d 25, 29 (1st Cir. 1925) (finding good faith on the part of a
bank where Charles Ponzi “had, so far, kept his agreements with the bank”).
29 Subsumed in these factors are such things as the level of risk associated with the investment; market
rates of return for investments carrying different levels of risk at the time the investment was made;
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part inquiry. Certain factors may be given more or less weight depending on the circumstances.
A transferee seeking the protections of the good faith defense need not necessarily present
evidence on all applicable factors.
Here, the Defendants contend that Mr. Hightower, the Trustee of the Ultima Plan, was
not aware that VCR intended to defraud its creditors. The Defendants argue that Mr. Hightower
conducted a reasonable and diligent inquiry into VCR’s finances using documents he received
after Ultima Homes entered into a construction contract with Mr. Vaughan. They also contend
that Mr. Hightower believed VCR was financially stable because it consistently paid its
obligations to the Ultima Plan. It is undisputed that: (1) Ultima Homes entered into a contract
with Mr. Vaughan to build his personal residence; (2) Mr. Hightower had knowledge regarding
Mr. Vaughan’s personal finances, including information about loans for which he had been
approved; and (3) the Ultima Plan invested $100,000 into the VCR promissory note program.
However, these facts are insufficient to establish that the Defendants are entitled the protections
of the good faith defense.
Although there is a range of evidence a party may present in support of the good faith
defense under the UFTA and 11 U.S.C. § 548(c), here the Defendants proffered very little of it.
For example, the Defendants statement of material facts include no facts regarding how VCR’s
promised interest rate of 16% per annum compared with markets rates of return at the time of
investment for investments with comparable or varying levels of risk. It is unclear whether the
investment was secured by collateral and if so, how that affected risk. The Defendants provided
no evidence regarding Mr. Hightower’s level of education, business experience, and financial
whether the transferor’s explanation regarding promised rates of return was reasonable; whether the
transferee consulted easily obtainable sources of information; whether the transferor provided a
prospectus, and if so, what type of information it contained; and whether the transferee asked for financial
information to support the decision to make the investment.
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literacy, or whether Mr. Hightower considered other investments. The Defendants have not
provided information about how VCR or Mr. Vaughan enticed him to invest in VCR’s
promissory note program or how the promissory note program was marketed to Mr. Hightower.
Further, it is unclear what the Defendants learned in connection with any review of any financial
information relating to VCR before investing in the promissory note program, whether they
consulted any other available sources to research VCR’s financials, or why Mr. Hightower
ultimately decided to invest.30 The Defendants have not even proffered the promissory notes in
evidence to establish the terms of the loan or when each loan was made.
The facts established by the Motion for Summary Judgment are insufficient to permit the
Court to conclude that Defendants have satisfied either component of the 2-part inquiry pertinent
to the good faith defense under the UFTA. Because the Defendants failed to establish that they
are entitled to judgment in their favor on the issue of good faith, the Court will not address the
“value” requirement in the good faith defense provision.
5. Whether Ultima Homes and Mr. Hightower Are Proper Parties
Finally, the Defendants contend that Mr. Hightower and Ultima Homes are not proper
parties to the suit because they did not receive any transfers from VCR. This argument is
unavailing. The Trustee is asserting claims against Mr. Hightower as trustee of the Ultima Plan,
not in his individual capacity. Consequently, whether Mr. Hightower personally received
transfers from VCR is not relevant.
With respect to Ultima Homes, it is unclear from the evidence presented in connection
with the Motion for Summary Judgment whether that entity received any fraudulent transfers
from VCR. It is undisputed that: (1) Ultima Homes contracted with Mr. Vaughan to build his
30 Although the Defendants reference their reasons for investing throughout their briefs, they did not
include that information in the statement of undisputed facts. The Court therefore did not consider these
assertions as evidence in connection with the Motion for Summary Judgment.
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personal residence; and (2) Ultima Homes did not receive funds from VCR in connection with
the note program. Although it does not appear that there was a transfer from VCR to Ultima
Homes, the Court needs additional facts to determine whether the Trustee has a valid fraudulent
transfer claim against Ultima Homes. For example, it is unclear from the evidence before the
Court whether Ultima Homes received payments for the construction contract from VCR or from
Mr. Vaughan. In addition, the statement of undisputed material facts does not include
information about whether VCR received reasonably equivalent value for any payments it made.
The Court therefore denies the Defendants’ request to dismiss Ultima Homes and Mr.
Hightower, as trustee of the Ultima Plan, from this suit.
CONCLUSION
Based on the foregoing, the Motion for Summary Judgment will be granted as to Count 1
(turnover) and denied as to all remaining counts. The Trustee’s turnover claim under 11 U.S.C.
§ 542 will be dismissed. The Court will enter a separate judgment and order consistent with this
Memorandum Opinion.
__________________________________
ROBERT H. JACOBVITZ
United States Bankruptcy Judge
Date entered on docket: May 24, 2013
COPY TO:
James Askew & Edward Mazel
Askew & Mazel, LLC
320 Gold Ave S.W.
Suite 300A
Albuquerque, NM 87102
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Maria Weddige-Gurney
The Ahr Law Offices, PC
6707 Academy Road NE, Suite A
Albuquerque, NM 87109
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