Judith A. Wagner, Chapter 11 Tr. of the Bankr. Ethe Vaughan Co. v. Lankford (In re Vaughan Co.)

In re: VAUGHAN COMPANY, REALTORS, Debtor.JUDITH A. WAGNER, Chapter 11 Trustee Of the bankruptcy estateof the Vaughan Company, Realtors, Plaintiff, v. DAVID LANKFORD and LEE ANN LANKFORD, Defendants.

Case No. 10-10759

Adv. No. 12-1139

UNITED STATES BANKRUPTCY COURT DISTRICT OF NEW MEXICO

Date: May 27, 2014

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.

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 DavidLankford, 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 thenfiled 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.

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 JointInvestment (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 bycounsel 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....