United States v. Badger

818 F.3d 563

UNITED STATES of America, Plaintiff–Appellant/Cross–Appellee,

v.George BADGER; Lajuana Badger; SB Trust ; David Badger, as Trustee for the SB Trust ; Ardco Leasing & Investment, LLC; American Resources and Development Company, Inc.; Springfield Finance and Mortgage Company, LLC, Defendants–Appellees/Cross–Appellants.

Nos. 14–4110

14–4119.

United States Court of Appeals, Tenth Circuit.

March 25, 2016.

Robert D. Kamenshine, Appellate Staff, Civil Division, (Benjamin C. Mizer, Principal Deputy Assistant Attorney General, Joyce R. Branda, Acting Assistant Attorney General, Carlie Christensen, United States Attorney, and Leonard Schaitman, Appellate Staff, Civil Division with him on the briefs) United States Department of Justice, Washington, D.C., for Appellant/Cross Appellee.

Shawn D. Turner, Turner & Stamos, (Stephen W. Cook, Cook & Monahan, with him on the briefs), Salt Lake City, UT, for the Appellees/Cross–Appellants.

Before LUCERO, HARTZ, and GORSUCH, Circuit Judges.

HARTZ, Circuit Judge.

In 2004 the Securities and Exchange Commission (SEC) entered into a stipulated judgment with George Badger enjoining him from various activities and requiring him to pay $19.2 million (the Consent Judgment). The government has recovered only $6,548. It seeks a declaration that American Resources and Development, Inc. (ARDCO), Springfield Finance and Mortgage Company, LLC (Springfield), SB Trust, and ARDCO Leasing & Investment, LLC (ARDCO Leasing) (collectively, Defendants) are Badger's alter egos so that their assets can be pursued to satisfy the Consent Judgment. The claim bears a similarity to claims invoking the well-known doctrine under which a court can "pierce the veil" of a corporate entity and hold an individual liable for what on its face is a corporate debt. See, e.g., NLRB v. Greater Kan. City Roofing, 2 F.3d 1047, 1051–52 (10th Cir.1993). But the claim here is a "reverse-piercing" claim because it seeks to hold a corporation (or like entity) liable for the debt of an individual. See Floyd v. IRS, 151 F.3d 1295, 1298 (10th Cir.1998).

The United States District Court for the District of Utah granted summary judgment for Defendants, ruling that the government's reverse-piercing alter-ego theory is not available under Utah law. Exercising jurisdiction under 28 U.S.C. § 1291, we hold that Utah law recognizes the theory. We also reject Defendants' alternative ground for affirmance—that the claim is governed by the Federal Debt Collection Procedures Act and is therefore barred as untimely—because the Act does not apply to this action to enforce a disgorgement order. We reverse and remand for further proceedings.

I. BACKGROUND

The government appeals only the district court's ruling that it cannot proceed on its reverse-piercing alter-ego theory.¹ The court essentially ruled that the government had failed to state a claim, regardless of the truth of its allegations. For the purposes of this appeal, we therefore take the allegations of the government's complaint (the Complaint) as true, see Gee v. Pacheco, 627 F.3d 1178, 1183 (10th Cir.2010), even though Defendants contest them. To provide background to this litigation, we can also take judicial notice of court proceedings. See id. at 1186.

The Consent Judgment arose out of unlawful conduct by Badger in fraudulently creating demand for securities issued by Golf Ventures, Inc. (GVI). To create a market for GVI stock in the early 1990s, Badger, a GVI executive, bribed brokers to promote GVI shares. Badger pleaded guilty in 1997 to several offenses, including the use of manipulative and deceptive devices in connection with the sale of a security, see 15 U.S.C. § 78j. GVI ultimately went bankrupt.

Badger profited from the scheme to inflate GVI's stock price as a GVI executive and investor in ARDCO, which was GVI's largest shareholder. After his guilty plea, the SEC sued him, seeking, among other things, disgorgement of his profits and payment of a civil penalty for his offenses.

In 2004 Badger agreed to a $19.2 million judgment comprising disgorgement of $5.8 million of profits from his securities fraud, $7.7 million in prejudgment interest, and a $5.8 million civil penalty. Our focus is on disgorgement. That remedy "consists of factfinding by a district court to determine the amount of money acquired through wrongdoing—a process sometimes called ‘accounting’—and an order compelling the wrongdoer to pay that amount plus interest to the court." SEC v. Cavanagh, 445 F.3d 105, 116 (2d Cir.2006). When the government pursues injunctive relief against one who has violated a statute protecting the public interest, it often also obtains an order to disgorge the unlawful profits from the wrongdoing. See, e.g., Porter v. Warner Holding Co., 328 U.S. 395, 397–400, 66 S.Ct. 1086, 90 L.Ed. 1332 (1946). "[S]ince the public interest is involved ..., [the court's] equitable powers assume an even broader and more flexible character than when only a private controversy is at stake." Id. at 398, 66 S.Ct. 1086 ; see SEC v. Rind, 991 F.2d 1486, 1491 (9th Cir.1993) (SEC suit to enforce securities laws, including seeking disgorgement of illicit profits, "vindicates public rights and furthers the public interest"). Disgorgement aids enforcement by making violations unprofitable, thereby deterring future violations. See Porter, 328 U.S. at 400, 66 S.Ct. 1086 ("Future compliance may be more definitely assured if one is compelled to restore one's illegal gains...."); SEC v. Fischbach Corp., 133 F.3d 170, 175 (2d Cir.1997) ("The primary purpose of disgorgement orders is to deter violations of the securities laws by depriving violators of their ill-gotten gains."); Rind, 991 F.2d at 1491 ("The effective enforcement of the federal securities laws requires that the [SEC] be able to make violations unprofitable." (internal quotation mark omitted)). For that reason, we have distinguished such disgorgement orders from judgments that are intended only to compensate victims for their losses. See Usery v. Fisher, 565 F.2d 137, 139 (10th Cir.1977) (consent-judgment order directing employer not to withhold past-due wages owed under Fair Labor Standards Act was "purely equitable in nature, not a money judgment," so employer could be held in contempt and imprisoned for failure to pay); cf. Fischbach Corp., 133 F.3d at 175 (victim compensation is a "distinctly secondary goal" of disgorgement orders in securities-fraud cases); Rind, 991 F.2d at 1491 (use of disgorgement proceeds to compensate victims "does not detract from the public nature of [SEC] enforcement actions").

As of July 2010, the government had recovered only $6,548—$2,228 paid voluntarily and $4,320 paid through deductions from Badger's social security payments and tax refunds. In December 2010 the district court held him in civil contempt for failing to make reasonable efforts to pay the amounts required by the Consent Judgment. The government seeks to increase its puny recovery by collecting from various entities that it claims are alter egos of Badger. Its theory is that Badger has been able to frustrate collection of the Consent Judgment by using Defendants to hide his assets through a series of convoluted transactions. The Complaint describes Defendants and their activities as follows:

A. ARDCO and Springfield

ARDCO, a Utah corporation, owns Springfield, a limited liability company, which conducts ARDCO's only business—investing. Badger's former son-in-law, Thomas Stamos, is the nominal president of ARDCO; but ARDCO, Springfield, and their property are controlled by Badger, who uses them to hide assets. Badger manages the investing activities: he opened all of Springfield's investment accounts, monitors the accounts, handles their day-to-day activities, and transfers money into and out of them. He had power of attorney over these accounts until 2009, when the SEC issued a subpoena to ARDCO in its efforts to collect on the Consent Judgment. When the government brought this action, both ARDCO and Springfield were operated out of Badger's home.

Of particular interest is ARDCO's relationship with GVI. ARDCO was GVI's largest shareholder. After GVI went bankrupt, an entity associated with Badger called Springfield Investment purchased property in St. George, Utah, from the bankruptcy estate. Springfield Investment later sold ARDCO its subsidiary Springfield, which developed the real estate. At the end of the development, Springfield had about $2 million in cash, which it invested in the commodity-futures market. Its investments were still worth about $2 million when the suit against Defendants was filed.

B. SB Trust

SB Trust, an irrevocable trust for the Badgers' children, was created by Badger and his wife on June 30, 1998, after he pleaded guilty to his criminal charges and the SEC brought its civil action. Badger's son David is the named trustee. The trust was initially funded with ARDCO shares.

In 2005, after the Consent Judgment, Badger's wife (to whom Badger had previously gifted his interest) donated the family home to SB Trust, although the Badgers deduct mortgage interest and other home expenses on their personal income-tax forms. The trust assets now include the family home, a building lot, cash, and a commodity trading account. As of December 31, 2008, the value of these assets exceeded $1.1 million.

SB Trust and its assets are controlled by Badger. He performs accounting work for the trust, holds himself out as managing agent for the trust's investment accounts, handles day-to-day account activity, and works with advisors to make investment decisions. Although Badger's son is the nominal trustee, Badger has managed the affairs of the trust without his son's knowledge or input. The trust pays much of Badger's personal living expenses and has paid at least $75,000 directly to him and his wife. In addition, the trust and ARDCO loaned $500,000 to Mrs. Badger, who has no financial expertise, to invest in the commodity-futures market. A trading...