MEMORANDUM DECISION AND ORDER GRANTING IN PART RECEIVER'S MOTION FOR SUMMARY JUDGMENT
DAVID NUFFER, District Judge.
This is an ancillary action to United States v. RaPower-3, LLC et al., 2:15-cv-00828-DN-DAO (D. Utah) ("Civil Enforcement Case"), brought by Plaintiff R. Wayne Klein, the Court-Appointed Receiver ("Receiver") of RaPower-3, LLC ("RaPower"), International Automated Systems Inc. ("IAS"), LTB1, LLC ("LTB1"), their subsidiaries and affiliates,
The Receiver seeks summary judgment on his First, Second, and Third causes of action arguing the transfers to Jean R. Armand are voidable because they were made with actual or constructive fraud.
Summary judgment in favor of the Receiver and against Jean R. Armand is appropriate on the Receiver's First, Sixth, and Seventh causes of action. The Receiver's Second, Third, Fourth, and Fifth causes of action are moot. Therefore, the Receiver's Motion for Summary Judgment
UNDISPUTED MATERIAL FACTS
The Receivership Defendants' fraudulent scheme
1. Johnson claimed to have invented solar energy technology, which involves solar lenses placed in arrays on towers.
2. To make money from this purported technology, Johnson sold a component of the technology: the solar lenses.
3. Through a multi-level marketing model (using affiliated entity RaPower), lenses were sold to hundreds of investors across the nation.
4. IAS or RaPower agreed to build solar towers and install the customers' lenses at a site determined by IAS or RaPower.
5. When customers purchased lenses, the customers also signed an operations and maintenance agreement with LTB1, with LTB1 agreeing to operate and maintain the customers' lenses to produce revenue.
6. LTB1 was to make quarterly payments to the lens purchasers, representing a portion of the revenues earned from the operation of the solar lenses.
7. No customer ever decided to buy a lens and then lease it to an entity other than LTB1.
8. Customers never took direct physical possession of their lenses. Because the Receivership Defendants did not track which lens belonged to which customer, there was no way for a customer to know which specific lens they owned. No customer has provided testimony that the owned lenses could be identified.
9. A bonus incentive program paid commissions or referral fees to persons who persuaded others to purchase solar lenses.
10. Johnson illustrated his idea as follows:
11. Johnson's entities retained the lenses and controlled what happened to them (if anything).
12. The Receivership Defendants emphasized how little any customer would have to do with respect to "leasing out" their lenses: "[s]ince LTB installs, operates and maintains your lenses for you, having your own solar business couldn't be simpler or easier."
13. The Receivership Defendants knew that they sold solar lenses to individuals who generally work full-time jobs, like teachers, school administrators, coaches, and others. They knew, or had reason to know, that their customers do not have special expertise in the solar energy industry.
14. The Receivership Defendants advertised substantial returns and tax benefits in exchange for only a down payment on the solar lenses:
15. The lens purchase program that Jean R. Armand solicited others to purchase was not registered as a security with the United States Securities and Exchange Commission or the Utah Division of Securities.
The Civil Enforcement Case against the Receivership Defendants
16. On November 23, 2015, the United States filed the Civil Enforcement Case against the Receivership Defendants alleging that they were operating a fraudulent solar energy scheme.
17. In the Civil Enforcement Case, the court found: "For more than ten years, the Receivership Defendants promoted an abusive tax scheme centered on purported solar energy technology featuring `solar lenses' to customers across the United States. But the solar lenses were only the cover story for what the Receivership Defendants were really selling: unlawful tax deductions and credits."
18. The Receivership Defendants sold solar lenses emphasizing their purported tax benefits. Customers were told that they could "zero out" their federal income tax liability by buying enough solar lenses and claiming both a depreciation deduction and solar energy tax credit for the lenses.
19. The purported solar energy technology and solar lenses, however, did not work and could not generate marketable energy. Specifically, the court found that the "purported solar energy technology is not now, has never been, and never will be a commercial-grade solar energy system that converts sunlight into electrical power or other useful energy" and "[t]he solar lenses do not, either on their own or in conjunction with other components, use solar energy to generate [marketable electricity]."
20. None of these solar lenses ever met the necessary elements to qualify for depreciation deductions or the solar energy tax credit. Indeed, "[h]undreds, if not thousands" of customer lenses were not even removed from the shipping pallets.
21. Notwithstanding the fact the solar lenses and technology never worked, the Receivership Defendants continued to sell solar lenses to customers emphasizing that customers would qualify for depreciation deductions and/or the solar energy tax credit. Between 45,205 and 49,415 solar lenses were sold to customers.
22. The Receivership Defendants' own transaction documents and testimony at trial in the Civil Enforcement Case showed that the gross receipts received by the Receivership Defendants were at least $32,796,196 and possibly much more.
23. Based on these facts and others, the court enjoined the Receivership Defendants in the Civil Enforcement Case from promoting their abusive solar energy scheme; ordered them to disgorge their gross receipts; and required them to turn over their assets and business operations to the Receiver.
24. The court found that the "whole purpose of RaPower, IAS, and LBT1 . . . was to perpetuate a fraud to enable funding for Neldon Johnson. The same is true for other entities Johnson created, controls, and owns. . . . Johnson has commingled funds between these entities, used their accounts to pay personal expenses, and transferred Receivership Property to and through them in an attempt to avoid creditors."
25. "Here, the whole purpose of RaPower was to perpetrate a fraud to enable funding of the unsubstantiated, irrational dream of Nel[d]on Johnson. The same is true for the other entities Johnson established and used including IAS, SOLCO I, XSun Energy, Cobblestone, and the LTB entities."
26. "[The Receivership] Defendants have no legitimate business, [the Receivership] Defendants' solar energy scheme is an abusive tax scheme and not a legitimate business."
27. "[The Receivership] Defendants do not have any revenue or income aside from the sale of solar lenses."
Jean R. Armand's involvement with the Receivership Defendants
28. Jean R. Armand acted as a salesperson for the Receivership Entities and sold solar lenses for depreciation deductions or solar energy tax credits.
29. Jean R. Armand received commissions from the Receivership Entities for these sales from 2011 to 2018 in the amount of $13,760.15.
30. Jean R. Armand was not licensed under state or federal securities law to sell securities.
Financial condition of certain Receivership Entities
31. IAS was a public company and filed annual reports that included audited financial statements. The most recent annual report filed by IAS was for 2016. In that report, IAS indicated that it had $0.00 of revenue for the most recent fiscal year.
32. IAS indicated that as the date of its annual report for 2016, it had "not marketed any commercially acceptable products" and "will continue to need additional operating capital either from borrowing or from the sale of additional equities."
33. IAS also indicated that "[s]ince inception, we have incurred operating losses each year of our operations and we expect to continue to incur operating losses for the next several years. We may never become profitable."
34. As of June 30, 2016, IAS indicated that it had accumulated deficits of $40,156,398 with only $3,997,445 in total assets.
35. IAS's annual report for 2016 also states that "[t]he accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses from operations that raises a substantial doubt about its ability to continue as a going concern."
36. RaPower's revenue came from the sale of solar lenses.
37. Johnson's technology never generated marketable electricity or revenue from the sale of power.
38. The obligation of investors to make payments from the purchase of the solar lenses (beyond the initial down payment) was conditioned on receiving income from the use of the lenses in producing solar power.
39. RaPower was liable to lens purchasers to refund the purchase price for lenses if customers wanted their money back.
Summary judgment is appropriate if "there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law."
The moving party "bears the initial burden of making a prima facie demonstration of the absence of a genuine issue of material fact and entitlement to judgment as a matter of law."
Judicial notice of the findings in the Civil Enforcement Case is allowed and those findings may be used in this ancillary proceeding
Jean R. Armand challenges the Receiver's use of findings of fact from the Civil Enforcement Case, arguing that he "was not a party to the lawsuit between the IRS and the Receivership Defendants and what was decided in that case cannot be binding on Defendant."
First, this action—along with other actions brought by the Receiver—arose directly from the Civil Enforcement Case.
In the receivership context, courts routinely use findings made as to receivership entities in proceedings against third parties.
Second, judicial notice of factual findings in the Civil Enforcement Case under Federal Rule of Evidence 201 is appropriate. In the summary judgment context, federal courts may "take judicial notice, whether requested or not, of its own records and files, and facts which are part of its public records."
Jean R. Armand has not presented facts or evidence to dispute the findings in the Civil Enforcement Case or to question their accuracy, beyond his unsupported subjective beliefs. Therefore, judicial notice of the facts from the Civil Enforcement Case is appropriate and is taken.
The Receiver is entitled to summary judgment on his voidable transfer claim because the transfers were made with actual intent to hinder, delay, or defraud
The Receiver seeks summary judgment on his First, Second, and Third causes of action under the Uniform Voidable Transactions Act ("UVTA").
The Receiver has standing to assert claims to avoid transfers
Jean R. Armand challenges the Receiver's ability to bring claims under the UVTA, arguing the Receiver has not identified a creditor of the Receivership Defendants.
The Tenth Circuit has recognized that a business entity abused by a fraudulent scheme qualifies as a defrauded creditor.
Here, the Receiver stands in the shoes of the defrauded Receivership Entities. These entities were "evil zombies" under the control of Johnson, who used the entities for his own purposes. Indeed, the "whole purpose of RaPower, IAS, and LBT1 . . . was to perpetuate a fraud to enable funding for Neldon Johnson. The same is true for other entities Johnson created, controls, and owns. . . . Johnson has commingled funds between these entities, used their accounts to pay personal expenses, and transferred Receivership Property to and through them in an attempt to avoid creditors."
Because the Receiver stands in the position of the defrauded Receivership Entities, the Receiver has standing and the ability to assert fraudulent transfer claims on behalf of the Receivership Entities.
The transfers are avoidable because they were made with actual intent to hinder, delay, or defraud creditors
Pursuant to the UVTA, a transfer is voidable if the debtor (here, the Receivership Entities) made the transfer with "actual intent to hinder, delay, or defraud any creditor of the debtor."
In In re Independent Clearing House Co., the district court examined transfers made by a fraudulent business entity, operating as a Ponzi scheme.
A similar finding is appropriate in this case based on the Undisputed Material Facts. Each transfer made to Jean R. Armand was payment for him bringing in additional purchasers of solar lenses.
At this time, insolvency and a Ponzi Scheme have not been found in this case. However, the Receivership Defendants did not conduct a legitimate business. The Undisputed Material Facts demonstrate that the selling of solar lenses perpetuated and expanded the Receivership Defendants' fraudulent scheme. Jean R. Armand was paid commissions by the Receivership Defendants for selling the solar lenses. Therefore, Jean R. Armand's conduct and the payments made to him perpetuated and expanded the Receivership Defendant's fraudulent scheme. The only reasonable inference from the Undisputed Material Facts and record evidence is that the transfers to Jean R. Armand were made with actual intent to hinder, delay, and defraud creditors of the Receivership Defendants. "[T]he question of intent to defraud is not debatable" where the Receivership Entities were operated as a fraudulent scheme.
Additionally, actual intent to defraud may be inferred based upon the consideration of badges of fraud, including those set forth in Utah Code Ann. § 25-6-202(2).
The Receiver has produced sufficient evidence of the badges of fraud. Jean R. Armand has failed to adequately dispute those badges of fraud, instead asserting only his own purported good faith. Therefore, based on the Undisputed Material Facts and record evidence, the transfers to Jean R. Armand were fraudulent as a matter of law.
The Receivership Defendants did not receive reasonably equivalent value in return for the transfers to Jean R. Armand
Because the transfers were made to Jean R. Armand with actual intent to hinder, delay, or defraud, the burden shifts to Jean R. Armand to show that the good faith defense applies because (1) he took the transfers in good faith, and (2) for reasonably equivalent value.
"[I]n determining whether reasonably equivalent value was given, the focus is on whether the debtor received reasonably equivalent value from the transfer."
Additionally, Jean R. Armand could not have provided reasonably equivalent value in exchange for the commission payments as a matter of law. All of the transfers to Jean R. Armand were payments of commissions for selling solar lenses to other investors. In Wing v. Holder, the receiver sought the return of referral fees paid to the defendant for bringing new investors into the fraudulent business.
Commission payments paid to parties that promote a fraudulent scheme constitute fraudulent transfers and the recipients of the commission payments do not give reasonably equivalent value. Jean R. Armand's sale of solar lenses further perpetuated the fraudulent tax scheme operated by the Receivership Defendants. Therefore, the Receivership Entities did not receive reasonably equivalent value as a matter of law.
Likewise, reasonably equivalent value was not provided because the payments to Jean R. Armand were illegal since he was not licensed to sell securities.
The Receiver is entitled to avoid the transfers to Jean R. Armand in the amount of $13,760.15. Judgment will be entered in the Receiver's favor and against Jean R. Armand on the Receiver's First cause of action for this amount. The Receiver's Second and Third causes of action under the UVTA are moot.
The Receiver is entitled to summary judgment on his securities claims
In addition to his claims under the UVTA, the Receiver also moves for summary judgment on his claims for violations of securities law because the securities sold by Jean R. Armand were not registered and he was not licensed to sell securities. Utah and Federal law require that securities be properly registered and prohibit the sale of unregistered securities.
The solar lens purchase program constitutes a security because it is an investment contract
The Receiver argues that the lens purchase program constitutes a security because it is an investment contract.
Howey involved the sales to investors of tracts of orange groves in Florida, combined with contracts to manage the orange groves for individual investors.
Each of the three elements of the Howey test is present here. Indeed, the structure of the lens purchase program and the structure of the orange grove program in Howey are substantially similar. It is undisputed that the first element—an investment of money—is met. Jean R. Armand argues the purchasers were merely purchasing a commodity—the solar lenses—and were not making an investment.
Like in Howey, the investors were purchasing more than solar lenses. They were purchasing the right to receive tax credits and deductions and to share in profits of a solar lens operation managed by the Receivership Defendants. Indeed, the solar lens customers never took direct physical possession of their lenses.
The second element—a common enterprise—is also present. To determine whether a common enterprise exists, courts examine the "economic reality of the transaction that occurred."
The presence of the third element—profits derived solely from the efforts of others—is also indisputably present. The purchasers of solar lenses would sign an operations and maintenance agreement with LTB1, with LTB1 agreeing to operate and maintain the customers' leases to produce revenue.
Because each element of the Howey test is met, the lens purchase program constitutes an investment contract and is a security.
Jean R. Armand violated securities laws by selling unregistered securities without being licensed
Because the lens purchase program constitutes a security, Jean R. Armand was required to be licensed to sell the security and the lens purchase program needed to be properly registered as a security. It is undisputed that Jean R. Armand was not licensed and that the lens purchase program was not registered. And it is immaterial whether Jean R. Armand knew that the lens purchase program constituted a security.
Because Jean R. Armand sold securities without being licensed under Utah or Federal securities laws, he violated Utah and Federal securities laws. And because the lens purchase program that Jean R. Armand solicited others to purchase was not registered as a security with the United States Securities and Exchange Commission or the Utah Division of Securities, Jean R. Armand violated Utah and Federal securities laws.
The Receiver is entitled to disgorgement of the commissions paid to Jean R. Armand
Finally, the Receiver has standing and the ability to disgorge the commissions Jean R. Armand received as a result of violating Utah and Federal securities laws. A receiver can recover commissions the defendant obtained illegally as a result of violations of securities laws.
Additionally, the Receiver has standing because he stands in the place of the Receivership Entities that were defrauded. The Receivership Entities were "evil zombies" under the control of Johnson, who used the entities for his own purposes. Now that the Receiver has been appointed, he can seek disgorgement of the illegal commissions paid to Jean R. Armand.
Therefore, the Receiver is entitled to disgorge the commission payments to Jean R. Armand in the amount of $13,760.15. Judgment will be entered in favor of the Receiver and against Jean R. Armand on the Receiver's Sixth and Seventh causes of action for this amount. The Receiver's Fifth cause of action for fraud in the offer and sale of securities is moot.
The Receiver's Fourth cause of action for unjust enrichment is moot
Because judgment will be entered in favor of the Receiver and against Jean R. Armand on the Receiver's First, Sixth, and Seventh causes of action in the amount of $13,760.15, the Receiver's Fourth cause of action for unjust enrichment is moot.
The Receiver is entitled to prejudgment interest
The Receiver is entitled to an award of prejudgment interest.
IT IS HEREBY ORDERED that the Receiver's Motion for Summary Judgment
The judgment entered in favor of the Receiver and against Jean R. Armand will be for the $13,760.15 received in commissions by Jean R. Armand, plus prejudgment interest in the amount of $2,107.36, and post judgment interest from the date of the entry of the judgment, at a rate equal to the weekly average 1-year constant maturity Treasury yield, as published by the Board of Governors of the Federal Reserve System, for the calendar week preceding the date of the judgment.
The Clerk is directed to close the case.