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Finn v. Moyes

United States District Court, D. Minnesota

March 30, 2017

PATRICK FINN and LIGHTHOUSE MANAGEMENT GROUP, INC., as Receiver for First United Funding, LLC and Corey N. Johnston, Plaintiffs,

          Gregory E. Karpenko, Joseph J. Cassioppi, and Ryan T. Murphy, FREDRIKSON & BYRON, P.A., for plaintiffs.

          Douglas L. Elsass and Lori A. Johnson, NILAN JOHNSON LEWIS P.A., for defendants.


          JOHN R. TUNHEIM Chief Judge

         This case arises from a Ponzi scheme whereby Corey Johnston under the name First United Funding, LLC (“First United”) defrauded numerous banks. A Minnesota district court appointed Plaintiffs Patrick Finn and Lighthouse Management Group, Inc. as receiver (“Receiver”) for First United and Johnston. Receiver seeks to collect funds on behalf of both the victim banks and First United from the alleged “primary [third- party] beneficiaries” of Johnston's Ponzi scheme: Defendants Jerry and Vickie Moyes (the “Moyeses”), Moyes Children's Limited Partnership (“MCLP”), The Jerry and Vickie Moyes Family Trust (the “Moyes Family Trust”), [1] and Coolidge 600 Acquisition Co., LLC (“Acquisition”). Acquisition now moves to dismiss all claims against it for lack of personal jurisdiction, and Receiver and Defendants separately move for partial summary judgment. For the reasons set forth below, the Court will grant Acquisition's motion to dismiss. The Court will also grant in part and deny in part both sides' motions for partial summary judgment.


         I. THE PARTIES

         A. Receiver

         First United is a Minnesota LLC previously operated by Johnston. (Declaration of Patrick Finn in Supp. of Pls.' Mot. for Partial Summ. J. (“Finn Decl.”) ¶ 5 & Exs. A-C, June 17, 2016, Docket No. 151.) Johnston, a Minnesota resident, used First United as part of a Ponzi scheme to defraud banks by, among other things, borrowing money from new banks to pay old banks and lying about the security for the loan. (Id.); see also Cmty. First Bank v. First United Funding, LLC, 822 N.W.2d 306, 308-09 (Minn.Ct.App. 2012). After the fraudulent scheme collapsed, a Minnesota district court authorized Receiver to enforce payment obligations owed to First United and investigate claims First United may have against any third party. (Finn Decl., Ex. C at 22-21, 23.) Receiver's authority includes both managing claims on behalf of First United's creditors (the “participant banks”), (Aff. of Lori A. Johnson in Supp. of Defs.' Mot. for Partial Summ. J. (“Johnson Aff.”), Ex. 1 at 10-12, June 17, 2016, Docket No. 149), and enforcing payment obligations owed to First United, (Finn Decl., Ex. C at 21, 23).

         B. The Moyes Parties

         The Moyeses are a husband and wife who reside in Arizona. (Id. ¶ 2.) The Moyeses are the trustees of the Moyes Family Trust, a trust formed under Arizona law that holds assets and interests in companies. (Id. ¶ 3 & Ex. D.) MCLP is a limited partnership formed under Arizona law and holds interests and assets on behalf of the Moyeses' children. (Id. ¶ 4.)

         C. Acquisition

         Acquisition is an Arizona LLC with two members: ninety-nine percent interest-holder Carefree Capital Investments, LLC (“Carefree”) and one percent interest-holder the Moyes Family Trust. (Aff. of Gerald F. Ehrlich (“Ehrlich Aff.”) ¶ 6 & Exs. A, C, June 17, 2016, Docket No. 154.) Carefree is owned by the Moyes Family Trust and Jerry Moyes. (Decl. of Patrick Finn in Opp. to Am. Mot. to Dismiss Acquisition (“Third Finn Decl.”) ¶ 8 & Ex. F, July 22, 2016, Docket No. 171.) Acquisition is taxed as a partnership and, therefore, is a flow-through entity for income tax purposes. (Ehrlich Aff. ¶¶ 6-7.) The parties agree Acquisition has no contacts with Minnesota and observes technical corporate formalities.


         In 2002, First United and Johnston “sold loan participations to banks, promising impressive returns.” Cmty. First Bank, 822 N.W.2d at 308. In fact, First United and Johnston conducted “a fraudulent scheme by overselling loan participations.” Id. “First United and Johnston sold participations to banks that had already been sold to other banks and sold participations in nonexistent loans.” Id. at 309. First United and Johnston paid early bank participants “with funds deposited by later participants, until the scheme collapsed.” Id.

         In August 2010, the U.S. Attorney's Office indicted Johnston on charges related to operating a Ponzi scheme involving “large commercial and personal loans.” (Finn Decl., Exs. E-F.) Johnston pled guilty the following month; as part of the plea, Johnston admitted to “knowingly and intentionally” engaging in a scheme to defraud banks. (Id., Ex. F at 5-6.)

         In September 2009, the participant banks commenced an action in state court, asserting Johnston and First United collectively owed approximately $135 million in unpaid principal, interest, and fees. Cmty. First Bank, 822 N.W.2d at 309. The state court appointed Receiver “to recover and to liquidate assets to pay the participant banks' outstanding claims.” Id. After extensive briefing, the state court approved use of the “net-investment method” to calculate the participant banks' damages. Id. at 309-10. This method did not determine loss based on “the amount each bank was owed on the date that the receiver was appointed” - the so-called “principal and interest method” - and, instead, calculated damages based on “the amount a bank ha[d] invested, minus any funds it ha[d] recovered.” Id. at 309. Thus, “[e]very dollar that First United had paid a bank [was] subtracted from the bank's principal investment.” Id.; (see also Second Aff. of Lori Johnson in Supp. of Mot. for Partial Summ. J. (“Second Johnson Aff.”), Ex. 1 at 2-3, Aug. 12, 2016, Docket No. 188). The state court reasoned that applying the net-investment method, as opposed to the principal and interest method, ensured participant banks were not unjustly rewarded for “experienc[ing] ‘legitimate' profits in the midst of a pervasive fraud, ” and the state court calculated the claim total at $91, 193, 042. (Second Johnson Aff., Ex. 1 at 2-5.)

         Similarly, at Johnston's federal-criminal sentencing, the Court applied the same damages calculation and concluded the government had “shown by a preponderance of the evidence” that the banks were “due restitution in the amount of $91, 193, 042.” (Am. Compl., Ex. G at 48, Feb. 24, 2016, Docket No. 93.) The Court found $91, 193, 042 would “make the [participant banks] whole, ” “fully compensate [the participant banks] for their losses, ” and “restore [the participant banks] to their original state of well-being.” (Id. at 47 (quoting United States v. Balentine, 569 F.3d 801, 806 (8th Cir. 2009)).) Since that time, Receiver successfully collected more than $81 million on behalf of the participant banks. (Finn Decl. ¶ 6 (stating in June 2016 Receiver had distributed $81 million to the participant banks); Aff. of Douglas L. Elsass in Supp. of Defs.' Mot. to Supp. the Record (“Second Elsass Aff.”), Nov. 3, 2016, Docket No. 195.) Through this lawsuit, Receiver seeks to collect additional funds which Receiver alleges the Moyes parties and Acquisition owe First United and the participant banks.


         A. $642 Million In Loans from the Ponzi Scheme

         In this lawsuit, Receiver alleges the Moyes parties were the primary beneficiaries of Johnston and First United's Ponzi scheme. (Finn Decl. ¶ 9.) Receiver asserts that during the course of the Ponzi scheme, First United provided the Moyes parties over $642 million in loans - more than ninety percent of the total loans First United issued. (Id.) The Moyes parties needed the loans, in part, because they faced financial issues in connection with their ownership of the Phoenix Coyotes hockey team. (Id., Ex. G at 15:4-16:9, 45:6-48-23.)

         Receiver claims the Moyes parties had actual knowledge of Johnston's fraudulent conduct and assisted Johnston and First United in defrauding the participant banks. Receiver states the Moyeses aided and abetted Johnston by fraudulently over-pledging loan collateral (id. at 86:3-26, 88:8-90:15; Decl. of Patrick Finn in Supp. of Pls.' Opp. to Defs.' Mot. for Partial Summ. J. (“Second Finn Decl.”), Ex. A at 10:2-21, 14:6-15, July 22, 2016, Docket No. 169; id., Ex. D at 9-10, id., Ex. E at 14-27; id., Exs. G-L), obtaining loans from Johnston after learning of the Ponzi scheme (Second Finn Decl., Ex. A at 9:12-10:1; id., Exs. M-N), and continuing to do business with Johnston after realizing Johnston engaged in a kick-back scheme with the Moyeses' employee Jim Miller (Finn Decl., Ex. G at 99:11-100:11; id., Ex. I at 19-25).

         B. Loans to Midtown

         In addition to claiming the Moyes parties are culpable for the Ponzi scheme by virtue of the loans they received from First United, Receiver alleges “[a]lmost all of the remaining loans were made to persons that the Moyes [p]arties introduced to Johnston.” (Finn Decl. ¶ 9.) According to Receiver, over the course of the Moyes parties' dealings with First United, the Moyeses convinced First United to issue loans to a financially-struggling real estate project in Utah - Midtown Joint Venture, L.C. (“Midtown”). (Finn Decl. ¶ 14; id., Ex. K at 92:16-93:6; id., Ex. L.) Receiver alleges (and the Moyes parties dispute) that the Moyeses and the Moyes Family Trust guaranteed two of First United's loans to Midtown - the “MJV-FUF4” loan and the “MJV-FUF6” loan.[2] Prior to Receiver's appointment, Midtown defaulted on its loans.[3] Receiver argues First United is entitled to collect, but never collected, guarantees on these loans. (Id. ¶ 17.)

         C. Coolidge, Acquisition, and Allegations of Fraudulent Transfer

         Finally, Receiver argues the Moyeses and Miller improperly received approximately $2.7 million that belonged to First United. At one point, Miller and the Moyeses held interests in a development company known as Coolidge 600, LLC (“Coolidge”). (Finn Decl. ¶ 29.) Receiver alleges First United loaned Coolidge approximately $2.2 million between November 20, 2003 and January 26, 2004. (Id., Exs. W-X.) In March 2004, the Moyeses learned Miller received illegal “kick-backs” from Johnston related to Coolidge. (Id., Ex. I ¶¶ 20, 58-82.) The Moyeses filed a lawsuit against Miller and, eventually, entered into a settlement agreement in April 2005. (Id., Exs. I, Z.) As part of the settlement, Miller agreed to transfer his interest in Coolidge to the Moyes Family Trust. (Id., Ex. Z §§ 3.1, 3.8.; Third Finn Decl., Ex. E at 3.)

         Coolidge later sold its assets and allegedly transferred sale proceeds in excess of $8 million to Jerry Moyes in August 2005. (Finn Decl., Ex. AA; Second Finn Decl., Ex. O.) According to Receiver, approximately $2.7 million of the sum transferred belonged to First United because of First United's previous loan to Coolidge.[4] (Finn Decl., Exs. X, AA-BB.) Instead of transferring these sales proceeds to First United, Receiver opines Coolidge improperly transferred the money to the Moyeses in violation of Minnesota law. (Id.)

         Arguing in the alternative, Receiver asserts that Coolidge's records document that Coolidge transferred First United's loan to Acquisition and the Moyeses “booked that transfer as a loan from First United to . . . Acquisition.” (Third Finn Decl. ¶ 13 & Ex. J.) Receiver claims Acquisition failed to repay the original loan and, instead, paid the money from the First United loan to Jerry Moyes. (Am. Compl. ¶¶ 270-79.) Receiver argues neither Acquisition nor Jerry Moyes repaid their loan, (Third Finn Decl. ¶ 13), and thus First United is entitled to damages for breach of a loan agreement.

         The Moyeses point out that Receiver never located any loan documents to support this claim.[5] The Moyeses further disagree with Receiver's characterization of events, alleging “the purpose of the transfer [from Acquisition to Jerry Moyes] was part of [the April 2005] settlement agreement between [Jerry] Moyes and . . . Miller.” (Decl. of Aaron Evans (“Evans Decl.”) ¶ 5, July 22, 2016, Docket No. 176.) Specifically, the Moyeses allege the transfer from Acquisition to Jerry Moyes “was for a return on the investor participation formerly held by Miller.” (Id.)


         The Moyes parties assert that after the state court appointed Receiver, their representatives worked in good faith to identify known loans and determine the amounts the Moyes parties borrowed from First United, ultimately agreeing to repayment terms. (See Decl. of J. Kevin Burdette (“Burdette Decl.”) ¶¶ 2-4, June 17, 2016, Docket No. 150.) On June 23, 2010, the Moyes parties signed a “Restructuring and Amended and Restated Loan Agreement” (“Restructuring Agreement”) and, after four forbearances, the Moyeses repaid the amounts specifically set forth in the Restructuring Agreement - approximately $54 million between 2010 and August 2013. (Id. ¶ 3; Finn Decl. ¶ 21 & Ex. N.)

         At the time of the Restructuring Agreement's execution, the parties agreed insufficient evidence existed to show the Moyeses signed the MJV-FUF4 and MJV-FUF6 guarantees. (Finn Decl., Ex. N §§ 9(z), 18.)[6] The Restructuring Agreement provided that if Receiver later discovered evidence that the Moyeses signed the MJV-FUF4 and MJV-FUF6 guarantees, the Moyeses and the Moyes Family Trust would honor the guarantees and repay the loans. (Id. § 9(z).) But the parties agreed to certain restrictions regarding this obligation, requiring Receiver to “present to” the Moyeses “enforceable guarantees executed by” the Moyeses in order to trigger the Moyes parties' duty to honor the guarantees. (Id.)


         In April 2014, Receiver filed this action against the Moyes parties after, allegedly, discovering evidence the Moyeses were aware of and actively assisted First United and Johnston's fraudulent conduct. (Notice of Removal, Attach. 1, Apr. 25, 2014, Docket No. 1.)

         During discovery, Receiver uncovered a guarantee of the MJV-FUF4 loan which both Jerry and Vickie Moyes executed on July 20, 2007. (Finn Decl., Exs. P-Q.) Discovery also unearthed internal accounting records reporting that Jerry Moyes guaranteed both MJV-FUF4 and MJV-FUF6 (id., Exs. R-S), and deposition testimony from an unrelated trial where Jerry Moyes admitted to executing MJV-FUF6 (id., Ex. V). Also, as stated above, Receiver obtained evidence during discovery indicating the Moyeses treated their receipt of the $2.7 million related to Coolidge as a loan from First United to Acquisition. (See Receiver's Mem. in Supp. of Mot. to Amend Compl., Oct. 29, 2015, Docket No. 57 at 6-7.)

         On October 29, 2015, Receiver moved to amend its Complaint in light of this evidence in order to add Acquisition as a party and assert a breach of loan agreement claims against Acquisition and the Moyeses. (Receiver's Mot. to Amend Compl., Oct. 29, 2015, Docket No. 55.) The Moyes parties opposed the motion, arguing the Court lacked personal jurisdiction over Acquisition. (Defs.' Mem. in Opp. to Receiver's Mot. to Amend Compl., Nov. 12, 2015, Docket No. 66.)

         United States Magistrate Judge Tony N. Leung ultimately granted Receiver's motion. (Order, Feb. 19, 2016, Docket No. 84.) While the Magistrate Judge questioned the Court's jurisdiction over Acquisition, the Magistrate Judge concluded it was inappropriate to decide issues of jurisdiction on a motion to amend. (Id. at 6-7.)

         Receiver filed an Amended Complaint on February 24, 2016. As relevant to the partial summary judgment motions, [7] Receiver asserts the following claims: Aiding and Abetting Breach of Fiduciary Duty (Count 2); Avoidance of Fraudulent Transfers pursuant to Minn. Stat. § 513.44(a)(1) (Count 3); Breach of MJV-FUF4 and MJV-FUF6 (Count 8); and Unjust Enrichment (Count 9). (Am. Compl. ¶¶ 218-37, 270-94.) The Court finds Receiver alleges Counts 2-3 and 9 on behalf of the participant banks (id. ¶¶ 225, 228-29, 289-91, 294), and Counts 8 on behalf of First United (id. ¶¶ 276-77, 286).

         After Receiver filed the Amended Complaint, Acquisition filed a motion to dismiss for lack of personal jurisdiction. Around the same time, both sides filed cross-motions for partial summary judgment - Receiver on Counts 3 and 8, and Defendants on Counts 2, part of 8, and 9. Defendants also request the Court find that Receiver is precluded as a matter of law from re-litigating the issue of damages.



         A. Standard of Review

         The Court must first address whether it may exercise personal jurisdiction over Acquisition. When a party challenges personal jurisdiction under Fed.R.Civ.P. 12(b)(2), and where, as here, the parties have conducted discovery, Receiver has “the burden of proving by a preponderance of the evidence the facts necessary to establish personal jurisdiction over [Acquisition].” Safco Prods. Co. v. WelCom Prods., Inc., 730 F.Supp.2d 959, 963 (D. Minn. 2010) (quoting Pieczenik v. Dyax Corp., 265 F.3d 1329, 1334 (Fed. Cir. 2001)). The Court must view all facts in the light most favorable to Receiver and resolve all factual conflicts in Receiver's favor. Janel Russell Designs, Inc. v. Mendelson & Assocs., Inc., 114 F.Supp.2d 856, 861 (D. Minn. 2000).

         The Court can exercise personal jurisdiction over a nonresident defendant if (1) Minnesota's long-arm statute, Minn. Stat. § 543.19, is satisfied; and (2) the exercise of personal jurisdiction does not offend due process. See Stanton v. St. Jude Med., Inc., 340 F.3d 690, 693 (8th Cir. 2003). Because Minnesota's long-arm statute extends the personal jurisdiction of Minnesota courts as far as due process allows, In re Minn. Asbestos Litig., 552 N.W.2d 242, 246 (Minn. 1996), the Court need only evaluate whether the exercise of personal jurisdiction comports with the requirements of due process, Guinness Imp. Co. v. Mark VII Distribs., Inc., 153 F.3d 607, 614 (8th Cir. 1998).

         Due process requires that Acquisition have “certain minimum contacts” with the forum state “such that the maintenance of the suit does not offend ‘traditional notions of fair play and substantial justice.'” Int'l Shoe Co. v. Washington, 326 U.S. 310, 316 (1945) (quoting Milliken v. Meyer, 311 U.S. 457, 463 (1940)). Sufficient minimum contacts exist if Acquisition's “conduct and connection with the forum State are such that [it] should reasonably anticipate being haled into court there.” World-Wide Volkswagen Corp. v. Woodson, 444 U.S. 286, 297 (1980). There must be some act by which Acquisition “purposefully avails itself of the privilege of conducting activities within the forum State, thus invoking the benefits and protections of its laws.” Hanson v. Denckla, 357 U.S. 235, 253 (1958). But contacts that are merely random, fortuitous, attenuated, or the result of “unilateral activity of another party or a third person” do not support personal jurisdiction. Burger King Corp. v. Rudzewicz, 471 U.S. 462, 474 (1985) (quoting Helicopteros Nacionales de Colombia, S.A. v. Hall, 366 U.S. 408, 417 (1984)).

         To determine whether Acquisition has sufficient contacts with the forum state, the Court examines five factors: “(1) the nature and quality of contacts with the forum state; (2) the quantity of the contacts; (3) the relation of the cause of action to the contacts;[8] (4) the interest of the forum state in providing a forum for its residents; and (5) convenience of the parties.” Epps v. Stewart Info. Servs. Corp., 327 F.3d 642, 648 (8th Cir. 2003). Whether personal jurisdiction can be asserted over a corporation under an alter-ego theory is a question of state law. See BioFuels Automation, Inc. v. Kiewit Energy Co., No. 10-610, 2010 WL 3023391, at *2 (D. Minn. July 28, 2010).

         B. Merits

         Acquisition argues this Court lacks personal jurisdiction over it. Specifically, though Carefree Capital Investments and the Moyes Family Trust own Acquisition, [9]Acquisition asserts it is not the alter ego of the Moyeses. Receiver responds that the record shows Acquisition is the alter ego of the Moyeses, and therefore, the Court may exercise personal jurisdiction over Acquisition.

         In Minnesota, a foreign corporation may be subject to personal jurisdiction by virtue of its subsidiary's activities in the forum, but “the companies must be organized and operated so that one corporation is an instrumentality or alter-ego of the other.” Zimmerman v. Am. Inter-Ins. Exch., 386 N.W.2d 825, 828 (Minn.Ct.App. 1986); see also JL Schwieters Constr., Inc. v. Goldridge Constr., Inc., 788 N.W.2d 529, 535-36 (Minn.Ct.App. 2010). To assess “whether to pierce the corporate veil in order to exercise personal jurisdiction over a foreign corporation, ” Minnesota courts consider the alter-ego factors set forth in Victoria Elevator Co. v. Meriden Grain Co., 283 N.W.2d 509, 512 (Minn. 1979).[10]Hunter-Keith, Inc. v. Gen. Elec. Credit Corp., No. 4-84-804, 1987 WL 8592, at *5 n.8 (D. Minn. Apr. 1, 1987). Jurisdictions other than Minnesota have held a court may exercise personal jurisdiction over an individual out-of-state shareholder - as opposed to an out-of-state parent corporation - whose dominance and control establishes that a company with ties to the forum-state is simply the shareholder's alter ego. E.g., Lakota Girl Scout Council, Inc., v. Harvey Fund-Raising Mgm't Inc., 519 F.2d 634, 636-38 (8th Cir. 1975). But see Stratasys, Inc. v. ProtoPulsion, Inc., No. 10-2257, 2011 WL 2750720, at *8 (Minn. Ct. App. July 18, 2011) (noting Minnesota courts have not yet adopted the ...

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