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Lewis v. Taylor

Supreme Court of Colorado, En Banc

September 17, 2018

C. Randel Lewis, solely in his capacity as receiver, Petitioner
v.
Steve Taylor. Respondent

          Certiorari to the Colorado Court of Appeals Court of Appeals Case No. 13CA239

          Attorneys for Petitioner: Gilbert Law Office, LLC Michael T. Gilbert Denver, Colorado

          Attorneys for Respondent: Podoll & Podoll, P.C. Richard B. Podoll Robert A. Kitsmiller Greenwood Village, Colorado Foley & Mansfield, PLLP Dustin J. Priebe Englewood, Colorado

          Attorneys for Amici Curiae Gerald Rome, Securities Commissioner for the State of Colorado, and the North American Securities Administrators Association: Cynthia H. Coffman, Attorney General Russell B. Klein, Deputy Attorney General Charles J. Kooyman, Assistant Attorney General Denver, Colorado

          OPINION

          HOOD, JUSTICE

         ¶1 Steve Taylor unwittingly invested millions of dollars in what proved to be a massive Ponzi scheme. Under the scheme, investors such as Taylor provided equity to various ostensibly legitimate investment companies. Those investors could withdraw the profits (if any) from their investments, but there was no guaranteed return. Before the scheme's collapse, Taylor fortuitously withdrew his entire investment, plus nearly half a million dollars in profit. Other, less-fortunate investors failed to escape in time and bore the brunt of the collapse; they eventually lost millions.

         ¶2 After the Ponzi scheme's collapse, a court-appointed receiver brought what is commonly referred to as an "actual fraud" claim under the Colorado Uniform Fraudulent Transfer Act ("CUFTA") section 38-8-105(1)(a), C.R.S. (2018), to claw back Taylor's profits. As an innocent investor, Taylor argued he should be allowed to keep the money, contending (in the words of a statutory affirmative defense) that he provided "reasonably equivalent value" in exchange for his profits. A division of the court of appeals concluded that Taylor was not precluded as a matter of law from keeping some of the profit, because he may have provided reasonably equivalent value in the form of the time value of his investment. The receiver appealed.

         ¶3 In this opinion, we consider whether Taylor may keep profit exceeding his initial investment based on the time value of money. We hold that he may not: Under CUFTA, an innocent investor who profited from his investment in an equity-type Ponzi scheme, lacking any right to a return on investment, does not provide reasonably equivalent value based simply on the time value of his investment. Therefore, we reverse the division's judgment and remand for further proceedings consistent with this opinion.

         I. Facts and Procedural History [1]

         ¶4 Respondent Steve Taylor invested $3 million in several investment companies run by Sean Mueller (the "Mueller Funds"). Within thirteen months, Taylor had withdrawn his entire investment, along with $487, 305.29 in profit. The Mueller Funds were later exposed as nothing more than a multi-million dollar Ponzi scheme. Even before Taylor invested, the Mueller Funds were already insolvent. They continued to diminish in value throughout Taylor's investment period. Mueller used Taylor's $3 million primarily to fund other investors' withdrawals, including some of Taylor's own withdrawals. And most of Taylor's withdrawals were funded by new contributions from other investors.

         ¶5 Though Taylor was fortunate to have withdrawn his full investment plus a profit before things went south, other investors weren't nearly so lucky. About ninety-five investors lost a total of approximately $72 million in the Mueller Funds after the scheme collapsed. Following that collapse, the trial court appointed the petitioner, C. Randel Lewis, as receiver ("the Receiver") for the Mueller Funds to collect and distribute assets among the losing investors.

         ¶6 The Receiver sued under CUFTA section 38-8-105(1)(a) to recover Taylor's nearly $500, 000 profit from the scheme. Taylor asserted an affirmative defense under CUFTA, arguing he should be able to keep his profits because (1) he was an innocent investor who didn't know the Mueller Funds were a Ponzi scheme, and (2) he provided "reasonably equivalent value" in exchange for his profits. The Receiver contended that, as a matter of law, Taylor must disgorge his profits and was entitled to keep only the $3 million representing his initial investment. The parties cross-filed motions for summary judgment. The trial court granted summary judgment in the Receiver's favor, concluding Taylor did not provide reasonably equivalent value in exchange for his profits as a matter of law.

         ¶7 Taylor appealed and a division of the court of appeals reversed. Lewis v. Taylor, 2017 COA 13, ¶ 34, P.3d . Observing that this was an issue of first impression in Colorado on which other jurisdictions were split, id. at ¶ 14, the division concluded the trial court erred by not considering the time value of Taylor's $3 million investment when determining whether he provided reasonably equivalent value in exchange for his profits. Id. at ¶ 27. It reasoned the case should be remanded for further factual findings to determine whether Taylor provided reasonably equivalent value-in the form of the time value of his initial investment-in exchange for each transfer of money he received from the Mueller Funds. Id. at ¶¶ 28-32.

         ¶8 The Receiver petitioned this court to review the division's judgment, and we granted his petition.[2]

         II. Standard of Review

         ¶9 This case requires us to review a trial court's order granting summary judgment and questions of statutory interpretation, both of which we review de novo. Front Range Res., LLC v. Colo. Ground Water Comm'n, 2018 CO 25, ¶ 15, 415 P.3d 807, 810 (summary judgment); State Farm Mut. Auto Ins. Co. v. Fisher, 2018 CO 39, ¶ 12, 418 P.3d 501, 504 (statutory interpretation).

         III. Analysis

         ¶10 We begin with a brief overview of common Ponzi schemes. Then, we discuss the CUFTA framework at issue here, highlighting the affirmative defense pertaining to transfers made in good faith and for reasonably equivalent value. Finally, we turn to the sole issue this case presents: Whether Taylor provided reasonably equivalent value in exchange for the profits he received. We focus on how the legislature has defined the term "value" and consider whether that definition encompasses the time value of an equity investor's money. While we conclude the language of the statute does not include the time value of money on an investment that an equity investor knew could be lost entirely, we nonetheless examine the split in caselaw on which the parties aimed their attention. In surveying that caselaw, we see an important distinction between cases in which an investor had a contractual right to a return on investment and those in which, as here, the investor had none. We see nothing in the extra-jurisdictional caselaw that militates against the conclusion we reach based on Colorado's statutory scheme: An equity investor in a Ponzi scheme, lacking any right to a return on investment, is not entitled to keep profits based simply on the time value of money.

         A. Ponzi Schemes

         ¶11 Generally speaking, a Ponzi scheme is a "fraudulent investment scheme in which money contributed by later investors generates artificially high dividends or returns for the original investors, whose example attracts even larger investments." Ponzi Scheme, Black's Law Dictionary (10th ed. 2014).

         ¶12 But not all Ponzi schemes take the same form. See Finn v. All. Bank, 860 N.W.2d 638');">860 N.W.2d 638, 652 (Minn. 2015) (noting in many Ponzi schemes "there is no legitimate source of earnings," but that "not every Ponzi scheme lacks a legitimate source of earnings"). For instance, one common type of Ponzi scheme involves the Ponzi schemer entering into a contract with an individual investor, under which the schemer promises to repay the investor's principal with interest payments. See Spencer A. Winters, The Law of Ponzi Payouts, 111 Mich. L. Rev. 119, 137 (2012) (describing different types of Ponzi schemes). This scheme is commonly called a fixed-income Ponzi scheme. See id. at 123. By contrast, in an equity-type Ponzi scheme, the Ponzi schemer does ...


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