United States District Court, E.D. Washington
FINDINGS OF FACT AND CONCLUSIONS OF LAW
ROSANNA MALOUF PETERSON, Chief District Judge.
This consolidated action was tried before the Court commencing on October 27, 2014. Plaintiff, Bruce P. Kriegman, the court-appointed Chapter 11 Trustee for LLS America, LLC ("Trustee"), was represented by Michael Loft and Matthew Mensik of Witherspoon Kelley. Defendants Keith Alexander ("Mr. Alexander") and 1127477 Alberta, Ltd. (the "Alberta Company") (collectively, "Defendants") were represented by Dillon Jackson and Adam Coady of Foster Pepper. The Court heard witness testimony and, having reviewed the admitted exhibits and being fully informed, makes the following findings of fact and conclusions of law:
1. Ponzi Scheme and Insolvency
On July 1, 2013, the Bankruptcy Court issued its Report and Recommendation Re Plaintiff's Motion for Partial Summary Judgment on Common Issues ("Report and Recommendation") recommending that the District Court grant the Trustee's Amended Motion for Partial Summary Judgment on two "Common Issues": (1) Debtor operated a Ponzi scheme; and (2) Debtor was insolvent at the time of its transfers to Defendants. On August 19, 2013, this Court adopted the Bankruptcy Court's Report and Recommendation and entered an order granting the Trustee's Amended Motion for Partial Summary Judgment on the Common Issues ("Order Adopting Report and Recommendation"). See 2:11-cv-00357-RMP, ECF No. 92. Therefore, this Court has determined that Debtor operated a Ponzi scheme and was insolvent at the time of each of the transfers to Defendants.
All of the findings and conclusions set forth in the Report and Recommendation and the Order Adopting Report and Recommendation are incorporated by this reference and are the law of this case.
2. Omnibus Hearing for the Testimony of Charles B. Hall
On January 31, 2014, this Court entered its Order Granting Plaintiff's Motion for Omnibus Hearing. ECF No. 47. Pursuant to that Order, the courtappointed examiner, Charles B. Hall, testified at an Omnibus Hearing in open court commencing on February 25, 2014. His testimony consists of written direct examination testimony that was filed on or about February 17, 2014, and the oral testimony that he gave at the Omnibus Hearing. Mr. Hall was cross examined by several defense attorneys and by some pro se defendants. Mr. Hall's testimony at the Omnibus Hearing is part of the record in this adversary action.
FINDINGS OF FACT
1. Debtor is the Little Loan Shoppe group of companies, which was formed originally in 1997. PO-1 at 11.
2. Debtor operated a Ponzi scheme, whereby investors' loans sometimes were used to pay other investors' promised returns on investments. PO-1 at 16.
3. Over the course of its existence, Debtor acquired approximately $135.4 million from investments made by individual lenders, usually documented by promissory notes offering interest returns in the range of 40% to 60% per annum. PO-1 at 7 n.2, 15.
4. Debtor accumulated payday loan bad debts of approximately $29 million, which were written off in 2009. PO-1 at 41.
5. Debtor was never profitable at any time during its existence and at no time did it generate sufficient profits to pay the amounts due the lenders. PO-1 at 16, 53.
6. The Alberta Company is a lender that received payments from Debtor.
7. Mr. Alexander, on behalf of the Alberta Company, filed a proof of claim (Claim No. 293-1 for $3, 167, 785.46).
8. The relevant conduct largely occurred in Spokane, Washington. See 2:11-cv-00362-RMP, ECF No. 148.
9. Defendants received promissory notes that were executed in Washington State. See, e.g., P-12.
10. Debtor ordered "stop payment" on some of the checks that it had given to Defendants, and other checks bounced. See, e.g., P-26 at 11-27, P-29 at 19; P-30 at 9.
11. Debtor voided approximately 29, 000 of the post-dated checks that it had issued to lenders, including Defendants. PO-1 at 26; P-16.
12. Defendants were given not sufficient funds ("NSF") checks or received post-dated checks that were voided by Debtor. P-16; P-17 at 28, 29.
13. Defendants received promissory notes that were rolled into or renewed by other promissory notes. See, e.g., P-10 at 2; P-11 at 4.
14. All of the transfers that the Trustee seeks to avoid were made within the period of September 1997 to July 21, 2009. See P-13.
15. Indicia and characteristics of the Ponzi scheme present in this case include:
a. Proceeds received from new investors masked as profits from running a payday loan business; PO-1 at 16, 22;
b. Promise of a high rate of return, usually between 40% to as much as 60%, on the invested funds; PO-1 at 19;
c. Debtor paid commissions to third parties who solicited new lenders, typically 10% of the amount received from the new lender; PO-1 at 20-21;
d. Debtor solicited funds as loans evidenced by promissory notes but demonstrated a pattern of "rolling over" the promissory notes when due onto new notes instead of paying off the obligation; PO-1 at 26;
e. Debtor, throughout its history, made false and misleading statements to current and potential lenders; PO-1 at 53-54;
f. Debtor was insolvent from its inception to the filing of its bankruptcy; PO-1 at 67.
16. The court-appointed examiner, Charles B. Hall, by way of education, experience, and vocation, is qualified to analyze and review the legitimacy of an enterprise's operation and to detect a fraud based on Ponzi scheme operations.
17. Mr. Hall's expert opinion is credible.
18. Curtis Frye's testimony, which pertained to Debtor's record keeping and the accounting of investment, payments, and consulting fees/commissions to Defendants, is credible.
19. Defendants received interest and principal payments from Debtor.
20. Defendants are "net winners."
21. The evidence does not show that Defendants conducted meaningful due diligence prior to investing in Debtor. See P-17 at 14-15, 26.
22. Defendants were promised high rates of return from Debtor of 60% per annum. P-12.
23. Defendants received post-dated checks from Debtor in advance of the time that payment would become due under Debtor's promissory notes. P-14; P-16; P-17 at 28.
24. Defendants loaned funds to Debtor after Debtor had "rolled" earlier loans into new promissory notes when payment had become due. See P-10 ...