United States District Court, D. Minnesota
Patrick Finn, as Receiver for First United Funding, Inc., Lighthouse Management Group, Inc., as Receiver for First United Funding, Inc., and Corey N. Johnston, Plaintiffs,
Jerry C. Moyes, individually and as Trustee of The Jerry and Vickie Moyes Family Trust, Vickie L. Moyes, individually and as Trustee of The Jerry and Vickie Moyes Family Trust, The Jerry and Vickie Moyes Family Trust, and Moyes Children's Limited Partnership, Defendants.
Gregory E. Karpenko, Joseph J. Cassioppi, and Ryan T. Murphy, Fredrikson & Byron, PA, Minneapolis, MN for Plaintiffs and
Adam A. Gillette, Lori A. Johnson, and Douglas L. Elsass, Fruth, Jamison & Elsass, PLLC, Minneapolis, MN for Defendants.
REPORT & RECOMMENDATION
TONY N. LEUNG, Magistrate Judge.
This matter is before the Court, United States Magistrate Judge Tony N. Leung, on Defendants' Motion to Dismiss for Improper Venue or In the Alternative, to Transfer Venue (ECF No. 6). This motion has been referred to the undersigned magistrate judge for a report and recommendation to the district court, the Honorable Michael J. Davis, Chief District Judge of the United States District Court for the District of Minnesota, pursuant to 28 U.S.C. § 636(b)(1)(B) and Local Rule 72.1(b).
A hearing was held. Gregory K. Karpenko and Ryan T. Murphy appeared on behalf of Plaintiffs. Douglas L. Elsass and Lori A. Johnson appeared on behalf of Defendants.
Based upon the record, memoranda, and the proceedings herein, IT IS HEREBY RECOMMENDED that Defendants' Motion to Dismiss for Improper Venue or In the Alternative, to Transfer Venue (ECF No. 6) be DENIED.
Plaintiffs Patrick Finn and Lighthouse Management Group, Inc. ("Lighthouse"), are the court-appointed receivers for Plaintiff Corey N. Johnston's company, First United Funding, LLC ("First United") and Johnston's non-exempt assets. (Compl. ¶¶ 1, 2, 11, 12, ECF No. 1-1.) Finn and Lighthouse (collectively "Plaintiffs") were appointed following Johnston's guilty plea in connection with a Ponzi scheme that resulted in losses of over $100 million to its victims. ( Id. ¶ 1.) Plaintiffs bring claims on behalf of victim banks allegedly defrauded by Johnston and First United.
A. Ponzi Scheme & Defendants' Receipt of Funds
In brief, the Ponzi scheme involved the sale of "participation interests or assignments in loans made by First United. First United loaned[, ] or purported to loan[, ] funds to borrowers in exchange for promissory notes and collateral...." ( Id. ¶ 22.) "The promissory notes and related loan documents were between the borrower and First United. First United then entered into agreements with banks..., whereby one or more [banks] purchased or acquired an interest in a purported promissory note between Frist United and the borrower." ( Id. ¶ 23.) Many of the loans were purportedly secured by stock. ( Id. ¶ 31(a); see id. ¶ 106.) In reality, however, Johnston and First United, among other things, oversold loans (selling participations that exceeded the amount actually loaned) and sold participations in counterfeit loans (no actual loan was made by First United to the purported borrower). ( Id. ¶¶ 31, 106.) The funds obtained were then used, in part, to make other loans. ( See id. ¶¶ 31, 106.) For their part, Johnston and First United misrepresented to the participating banks, i.e., those banks purchasing interests in the loans, that the purported loans were "properly collateralized by stock." ( Id. ¶ 6.)
Defendants Jerry C. Moyes, individually and as trustee of The Jerry and Vickie Moyes Family Trust; Vickie L. Moyes, individually and as trustee of The Jerry and Vickie Moyes Family Trust; The Jerry and Vickie Moyes Family Trust; and Moyes Children's Limited Partnership (collectively "Defendants") "were First United's primary borrowers." ( Id. ¶ 3.) Over 90% of the loans made by First United were to Defendants. ( Id. ¶ 3.) "At the time of [Plaintiffs'] appointment, over $70 million in loans to [Defendants] and other entities in which they held an interest were in default.... [Plaintiffs] ha[ve] since collected approximately $62 million of these loans." ( Id. ¶ 4.)
B. Instant Litigation
In this action, Plaintiffs allege that "Defendants had actual knowledge of, and aided and abetted Johnston's Ponzi scheme, including Johnston's sale of participations in counterfeit and oversold loans." ( Id. ¶ 5; see also id. ¶¶ 189-93.) Plaintiffs allege that Defendants actively participated in the over-pledging of their stock to obtain loans, including representing to the banks that the stock was "free and clear of all liens and encumbrances, '" ( id. ¶ 143), and a certain amount of stock existed in the purported collateral accounts, ( id. ¶¶ 143-45). Plaintiffs allege that Defendants, among other things, "signed more than 100 fraudulent pledge documents involving First United, including third[-]party pledge agreements and security account control agreements." ( Id. ¶ 147.) Plaintiffs allege that Defendants had actual knowledge that the representations made in the pledge agreements were false based on documents exchanged between Defendants and Johnston and First United showing the over-pledging of the stock. ( Id. ¶¶ 148-49; see id. ¶¶ 152-56.) Plaintiffs allege that, without Defendants' false representations, Johnston and First United would not have been able to sell loans to the participant banks or make additional loans to Defendants. ( Id. ¶ 150; see id. ¶ 151.) Plaintiffs further allege that Defendants threatened to expose the fraudulent conduct of Johnston and First United if additional funds were not provided to them. ( Id. ¶¶ 179-87.)
Plaintiffs bring multiple claims against Defendants based on their alleged participation in the Ponzi scheme. First, Plaintiffs allege that Defendants aided and abetted fraud and aided and abetted breach of the fiduciary duty owed by Johnston and First United to the participant banks. ( Id. ¶¶ 194-207.) Second, alleging the transfers were fraudulent at the time they were made, Plaintiffs also seek to void several transfers made by First United to Defendants and recover the transferred funds. ( Id. ¶¶ 208-251.) Third, Plaintiffs have asserted a claim for unjust enrichment. ( Id. ¶¶ 252-59.)
III. VENUE MOTION
The present issue before this Court is where this action should be venued. Resolution of this issue requires examining a number of factors, including the physical location of the parties, witnesses, and evidence as well as where the alleged events underlying this ligation occurred, the law to be applied, and the interests of justice.
Johnston and First United are Minnesota residents. ( Id. ¶¶ 10-11.) First United was based in Lakeville, Minnesota. ( Id. ¶ 10.) Johnston is also currently incarcerated in a federal prison camp in Duluth, Minnesota. ( Id. ¶ 1.) Plaintiffs are also Minnesota residents. ( Id. ¶ 12.) Defendants are all residents of Arizona. ( Id. ¶¶ 13-15.)
The banks on whose behalf Plaintiffs bring this action include both Minnesota and non-Minnesota residents. There are three Minnesota banks, ( id. ¶¶ 43, 64, 67), and a total of twelve banks from the states of North Dakota (two), Wisconsin (three), Kansas (two), Illinois (one), Arizona (one), Texas (two), and Iowa (one), ( id. ¶¶ 40, 49, 46, 55, 58, 52, 61, 70, 73, 76, 82, 79).
A. Proper Venue
Although Defendants' motion seeks transfer of venue in the alternative, Defendants spend the bulk of their briefing focusing on a district court's discretion to transfer an action to another district. (Defs.' Mem. in Supp. at 5-11, 15-16, ECF No. 8.) Nevertheless, as this motion was brought under Fed.R.Civ.P. 12(b)(3), the Court first considers whether the District of Minnesota is an improper venue.
Under Rule 12, a party may move to dismiss an action for "improper venue." Fed.R.Civ.P. 12(b)(3). This action was initially brought in state district court in Dakota County, Minnesota, and removed to this Court. (Notice of Removal ¶ 1, ECF No. 1.) "Title 28 U.S.C. § 1441(a) governs the venue of removed actions, and authorizes removal to the district court for the district and division embracing the place where the state court action is pending." St. Clair v. Spigarelli, 348 Fed.App'x 190, 192 (8th Cir. 2009) (citing Polizzi v. Cowles Magazines, Inc., 345 U.S. 663, 665-66 (1953)); see Toomey v. Dahl, No. 14-cv-3249 (JNE/TNL), ___ F.Supp. 3d ___, 2014 WL 5496617, at *2 (D. Minn. Oct. 30, 2014) ("Supreme Court precedent and the body of law interpreting that precedent clearly establish that section 1391 does not apply to actions removed to federal court." (citing cases)); 14C Charles Alan Wright, Arthur R. Miller, Edward H. Cooper, & Joan E. Steinman, Federal Practice and Procedure § 3732 (4th ed. 2009) (hereinafter Wright & Miller) ("[T]he general venue statutes, Section 1391 through Section 1393, do not apply to cases that have been initiated in a state court and removed to a federal court."). Section 1441(a) provides that a civil action may be removed from a state district court "to the district court of the United States for the district and division embracing the place where such action is pending." 28 U.S.C. § 1441(a). This matter was removed from state district court to federal district court in the District of Minnesota, wherein the state matter was pending. Therefore, ...