“The test for ‘insolvency’ under . . . the Bankruptcy Act is not the inability to meet current obligations but is the state of having liabilities exceed assets.”
How later courts described this case
- “The test for ‘insolvency’ under . . . the Bankruptcy Act is not the inability to meet current obligations but is the state of having liabilities exceed assets.”
- summary judgment entered for fraudulent transfer on basis of insolvency when transfers occurred years before judgment for securities fraud
- recipients of fraudulent transferred offered no controverting evidence of solvency when they presented balance sheets, as opposed to using a fair valuation
- Also mentions; Mutual Benefits, 408 F.3d at 738
Written by the judges who cited it.
The opinion
ACCEPTED
03-14-00518-CV
6061835
THIRD COURT OF APPEALS
AUSTIN, TEXAS
7/14/2015 3:04:58 PM
JEFFREY D. KYLE
CLERK
03-14-00518-CV
IN THE COURT OF APPEALS FILED IN
3rd COURT OF APPEALS
FOR THE THIRD DISTRICT OF TEXAS AUSTIN, TEXAS
AT AUSTIN 7/14/2015 3:04:58 PM
JEFFREY D. KYLE
Clerk
JAMES POE AND SENIOR RETIREMENT PLANNERS, LLC
APPELLANTS
v.
EDUARDO S. ESPINOSA, IN HIS CAPACITY AS
RECEIVER OF RETIREMENT VALUE, LLC APPELLEE
Appeal from 200th Judicial District Court of Travis County, Texas
(Hon. Gisela D. Triana, Presiding)
APPELLEE’S BRIEF
Respectfully submitted,
George, Brothers, Kincaid
& Horton, L.L.P
John W. Thomas
State Bar No. 19856425
114 W Seventh, Suite 1100
Austin, TX 78701-3015
Telephone: (512) 495-1400
Facsimile: (512) 499-0094
jthomas@gbkh.com
ATTORNEYS FOR APPELLEE
APPELLEE REQUESTS ORAL ARGUMENT
TABLE OF CONTENTS
Page
INDEX OF AUTHORITIES……………………………………………………………………………iii
STATEMENT REGARDING ORAL ARGUMENT…………………………………………… xi
STATEMENT OF FACTS……………………………………………………………………………….1
RV Misrepresented the Potential Risks and Returns …………………….. 3
RV Misused Premium Reserves …………………………………………………….. 8
RV’s Model Would Not Work ……………………………………………………….. 10
SUMMARY OF THE ARGUMENT……………………………………………………………… 11
ARGUMENT……………………………………………………………………………………………..12
ISSUE 1: SETTLEMENT CREDITS……………………………………………………..12
1. Standard of Review……………………………………………………12
2. Argument…………………………………………………………………..13
ISSUE 2: OBJECTIONS TO AFFIDAVITS………………………………………….. 22
1. Espinosa’s July 29, 2011 Affidavit………………………………22
2. Espinosa’s May 1, 2013 Affidavit………………………………. 27
3. Burchett’s May 1, 2013 Affidavit……………………………... 27
4. No Reversible Error …………………………………………………..30
ISSUE 3: THERE WERE NO FACT ISSUES……………………………………….. 31
ii
1. §24.005(a)(1)……………………………………………………………31
2. §24.005(a)(2)(A) & (B)……………………………………………….42
3. §24.006(a)……………………………………………………………….. 47
4. The Receivers Standing …………………………………………….55
PRAYER……………………………………………………………………………………………….……61
CERTIFICATE OF COMPLIANCE………………………………………………………………. 62
CERTIFICATE OF SERVICE…………………………………………………………………………62
APPELLEE’S APPENDIX………………………………………………………………………………63
iii
INDEX OF AUTHORITIES
Cases Pages
Akin, Gump, Strauss, Hauer and Feld, LLP v. E-Court, Inc.,
2003 WL 21025030 (Tex.App.—Austin 2003, no pet.) ...................... 15, 59
Anderson v. Snider,
808 S.W.2d 54 (Tex. 1991) ...................................................................... 30
BAC Home Loans Servicing, LP v. Texas Realty Holdings, LLC,
2010 WL 3522981 (S.D. Tex. 2010) .......................................................... 36
Bowman v. El Paso CGP Co.,
431 S.W.3d 781 (Tex. App – Houston (14th Dist.) 2014,
pet. denied) ............................................................................................ 51
B.T. Healthcare, Inc. v. Honeycutt
196 S.W.3d 296 (Tex.App. – Amarillo 2006, no pet.) .............................. 20
Burnett v. Chase Oil & Gas, Inc.,
700 S.W.2d 737 (Tex. App. 1985, no writ) .............................................. 38
City of Harlingen v. Estate of Sharboneau,
48 S.W.3d 177 (Tex. 2001) ...................................................................... 58
Cobalt Multifamily Investors I, LLC v. Arden,
2012 WL 3838834 (S.D.N.Y. 2012), adopted,
2012 WL 3835400 (S.D.N.Y. 2012) .................................................... 36, 41
Cotton v. Republic Nat’l Bank of Dallas,
395 S.W.2d 930 (Tex.Civ.App. —Dallas 1965, writ ref’d n.r.e.) ...............59
Cristus Helath v. Dorriety,
345 S.W.3d 104 (Tex.App. – Houston [14th Dist.] 2011, pet denied) .......15
Crown Life Ins. Co. v. Casteel,
22 S.W.3d 378, 391 (Tex. 2000) ........................................................ 17, 20
iv
CTTI Priesmeyer, Inc. v. K&O Ltd. P'ship,
164 S.W.3d 675 (Tex. App.–Austin 2005, no pet.)................................... 17
Donell v. Kowell,
533 F.3d 762 (9th Cir. 2008) ................................................................... 45
Duran v. Henderson,
71 S.W.3d 833 (Tex. App.—Texarkana 2002, pet. denied) ......................39
Engelkes v. Farmers Co-op. Co.,
194 F. Supp. 319 (N.D. Iowa 1961).......................................................... 53
English Freight co. v. Knox,
180 S.W.2d 633 (Tex.Civ.App. – Austin 1944, writ ref’d w.o.m.) .............59
Farmers Bank of Clinton, Mo. v. Julian,
383 F.2d 314 (8th Cir. 1967), cert. denied, 389 U.S. 1021 (1967) ............52
Field v. AIM Management Group, Inc.,
845 S.W.2d 469, 472 (Tex. App.-Houston [14th Dist.] 1993, no pet.) .......60
Frees v. Baker,
81 Tex. 216, 16 S.W. 900, 901 (1891) ..................................................... 38
Glenn H. McCarthy, Inc. v. Knox,
186 S.W.2d 832 (Tex. Civ. App. – Galveston 1945, writ ref’d) .................59
Guardian Consumer Fin. Corp. V. Langdeau,
329 S.W.2d 926 (Tex.Civ.App.-Austin 1959, no wit) .......................... 58, 59
Gordon v. Dadante,
2010 WL 4137289 (N.D.Ohio 2010) ........................................................ 41
Hays v. Adams,
512 F. Supp. 2d 1330 (N.D. Ga. 2007) ..................................................... 41
v
In re Bayou Grp., LLC,
439 B.R. 284 (S.D.N.Y. 2010) ............................................................. 39, 50
In re Bell & Beckwith,
64 B.R. 620 (Bankr. N.D. Ohio 1986) ....................................................... 34
In re Brentwood Lexford Partners, LLC,
292 B.R. 255 (Bankr. N.D. Tex. 2003) ................................................ 51, 52
In re Canyon Sys. Corp.,
343 B.R. 615 (Bankr. S.D. Ohio 2006) ...................................................... 45
In Re Cowin,
492 B.R. 858 (Bkrtcy. S.D. Tex. 2013) ...................................................... 36
In re Dillard Dept. Stores, Inc.,
181 S.W.3d 370 (Tex.App.-El Paso 2005, no pet.),
citing, DeWoody v. Rippley, 951 S.W.2d 935 (Tex.App.-Fort Worth
1997, writ dism'd by agr.) ....................................................................... 60
In re IFS Financial Corp.,
Bkrtcy.S.D.Tex.2009, 417 B.R. 419, subsequently affirmed
669 F.3d 255 (Also mentions; In re IFS Financial Corp.,
669 F.3d 255, 265 (5th Cir. 2012))...................................................... 36, 41
In re Imagine Fulfillment Servs., LLC,
2014 WL 3867531 (B.A.P. 9th Cir. Aug. 6, 2014) ..................................... 56
In re Indep. Clearing House Co.,
77 B.R. 843 (D. Utah 1987) ..................................................................... 37
In re Merry-Go-Round Enterprises, Inc.,
229 B.R. 337 (Bankr. D. Md. 1999) .................................................... 51, 56
In re Nat'l Consumer Mortgage, LLC,
2013 WL 164247 (D. Nev. Jan. 14, 2013) ................................................ 38
vi
In re ORBCOMM Global, L.P.,
2003 WL 21362192 (Bankr. D. Del. June 12, 2003) ................................. 56
In re Pioneer Home Builders, Inc.,
147 B.R. 889 (Bankr. W.D. Tex. 1992) ..................................................... 52
In re Princeton-New York Investors, Inc.,
255 B.R. 376 (Bkrtcy. D. N.J. 2000).......................................................... 52
In re Ramirez,
2011 WL 30973 (Bankr. S.D. Tex. Jan. 5, 2011) ....................................... 40
In re Ramirez Rodriguez,
209 B.R. 424 (Bankr.S.D.Tex.1997) ......................................................... 47
In re Rodriguez,
204 B.R. 510, 514 (Bankr. S.D. Tex. 1995), subsequently aff'd,
95 F.3d 54 (5th Cir. 1996) ....................................................................... 27
In re Trans Texas Gas Corp.,
597 F.3d 298 (5th Cir. 2010) ................................................................... 46
In re Trans World Airlines, Inc.,
134 F.3d 188, (3d Cir. 1998).................................................................... 56
Jackson Law Office, P.C. v. Chappell,
37 S.W.3d 15 (Tex.App.-Tyler 2000, pet. denied).................................... 53
Janvey v. Alguire,
846 F.Supp.2d 662 (N.D. Tex. 2011) .................................................. 32, 41
Janvey v. Alguire,
647 F.3d 585 (5th Cir. 2011) .............................................................. 34, 41
Klein v. Patterson,
2013 WL 3776266 (D.Utah 2013)............................................................ 41
vii
LJ Charter, LLC v. Air America Jet Charter, Inc.,
2009 WL 4794242 (Tex.App. – Houston [14th Dist.]
2009 pet. denied) ............................................................................. 12, 17
Matter of Lamar Haddox Contractor, Inc.,
40 F.3d 118 (5th Cir. 1994) ..................................................................... 52
Metal Bldg. Components, LP v. Raley,
2007 WL 74316 ...................................................................................... 12
Miller v. Argumaniz,
2015 WL 595468 (Tex.App. – El Paso 2015, mot. for
Extension of time to file pet. granted) .................................................... 23
MultiFamily Investors I, LLC v. Lisa Arden,
2010 WL 3791040 *3 (S.D.N.Y. 2010), adopted,
2010 WL 3790915 (S.D.N.Y. Sept. 28, 2010) ........................................... 41
Natural Gas Pipeline Co. of American v. Justiss,
397 S.W.3d 150 (Tex. 2012) .................................................................... 24
Osbourne v. Jaugegi, Inc.,
252 S.W. 3d 70 (Tex.App.—Austin 2008, no pet.) ................................... 19
Ramsey v. Spray,
2009 WL 5064539 (Tex.App. – Fort Worth 2009, pet. denied) ................12
Reid Rd. Mun. Util. Dist. No. 2 v. Speedy Stop Food Stores, Ltd.,
337 S.W.3d 846, 852-53 (Tex. 2011) ....................................................... 22
Reservoir Sys., Inc. v. TGS-NOPEC Geophysical Co., L.P.
335 W.w.3d 297 (Tex.App. – Houston 14th Dist.]
2010, pet. denied ................................................................................... 16
Shaw v. Borchers,
46 S.W.2d 967 (Tex. Comm’ App. 1932, judgm’t adopted) ....................59
viii
Scheck Investments, L.P. v. Kensington Management, Inc.,
2009 WL 1916501 (S.D.Fla. 2009) ........................................................... 42
Scholes v. African enterprise, Inc.,
838 F.Supp. 349 (N.D. Ill. 1993) .............................................................. 36
S.E.C. v. Antar,
120 F. Supp. 2d 431, 443 (D.N.J. 2000) aff'd,
44 F. App'x 548 (3d Cir. 2002) ................................................................. 40
S.E.C. v. Cook,
2001 WL 256172 (N.D. Tex. 2001) .......................................................... 41
SEC v. Mutual Benefits Corp., 408 F.3d 737 (11th Cir. 2005)
(Also mentions; Mutual Benefits, 408 F.3d at 738)
SEC Trust of Austin v. Lipscomb County,
180 S.W.2d 151 (Tex. 1944) .................................................................... 59
Sherrod v. City Nat. Bank of Wichita Falls,
294 S.W. 295, (Tex. Civ. App. – Amarillo 1927, writ ref’d)....................... 38
Sierad v. Barnett,
164 S.W.3d 471 (Tex. App. 2005)............................................................ 22
Texas Capital Sec., Inc. v. Sandefer,
108 S.W.3d 923, 926 (Tex. App.—Texarkana 2003, pet. denied) ............12
Trans World Airlines, Inc., v. Travellers International AG (In re Trans
World Airlines), 180 B.R. 389, 423–24 (Bankr.D.Del.1994)......................55
Utts v. Short,
2004 WL 635342 (Tex. App. – Austin 2004, pet. denied) ....................... 12
Walker v. Anderson,
232 S.W.3d 899 (Tex.App. – Dallas 2007, no pet.) .................................. 34
ix
Warfield v. Byron,
436 F.3d 551 (5th Cir. 2006) .................................................................... 46
Weslaco Federation of Teachers v. Texas Educ. Agency,
27 S.W.3d 258 (Tex. App.-Austin 2000, no pet.) ..................................... 60
Whatley v. Lindeman, Inc.,
2005 WL 291469 (Tex. App. – San Antonio 2005, pet. denied) ...............13
Wheeler v. American Nat. Bank of Beaumont,
162 Tex. 502 S.W.2d 918 (Tex. 1961) ...................................................... 59
Wuliger v. Mann,
2005 WL 1566751 (N.D.Ohio 2005) ........................................................ 42
Statutes
Bankruptcy Code 11 U.S.C. § 101 .................................................... 40, 51, 55
Bankruptcy Code 11 U.S.C. § 548 .................................................... 34, 35, 46
Bankruptcy Code 11 U.S.C. § 550 ................................................................ 35
Tex. Bus. & Com. Code Ann. § 24.002 ....................................... 32, 38, 39, 40
Tex. Bus. & Comm. Code Ann. 24.003 ....................................... 51, 52, 55, 56
Tex. Bus. & Com. Code Ann. §§ 24.005 .................... 31, 32, 34, 35, 42, 44, 45
Tex. Bus. & Comm. Code § 24.006 ............................................ 31, 47, 48, 53
Unif. Fraudulent Transfer ……………………………………………….. 35, 40, 46, 47, 51
Unif. Fraudulent Transfer Act §2 cmt. 1 ................................................ 46, 51
Unif. Fraudulent Transfer Act §3 cmt. 2 ..........................................................
x
STATEMENT OF ORAL ARGUMENT
Appellee requests oral argument pursuant to rule 39.1 of the rules of
appellate procedure. Appellee believes that this Court’s decisional process
will be significantly aided by oral argument so that the parties may address
factual and legal questions the Court may have.
xi
STATEMENT OF FACTS
This case arises from a massive $77 million securities fraud scam
perpetrated by the owners of Retirement Value (“RV”) and its outside sales
agents, including James Poe, against 900 investors. The Receiver has only been
able to recover a fraction of the damages caused by the scheme Poe participated
in. Poe admits that RV was a scam, admits that he sold the scam to unwitting
victims and admits he received $485,654.13 for doing so. Incredibly, he asserts he
is entitled to keep his ill-gotten gains. This Court should affirm the trial court’s
judgment that he may not do so.
RV sold a security to the public based on the anticipated proceeds of life
settlement transactions entered into by RV. The investment was structured as a
loan to RV, whereby the investors provided funds in exchange for RV’s promise to
pay a fixed sum of money at a date in the future. (CR 399-401) 1. RV would use
investor funds to purchase life insurance policies on third parties, and pay the
premiums. The amount that RV agreed to pay each investor was tied to the life
expectancy of insureds under the life insurance policies. RV agreed to pay a
1
Some of the citations are to evidence included in the State’s motion for summary judgment
against RV, which was incorporated by reference into the Receiver’s motion for summary
judgment which is the basis of this appeal. (2ndSuppCR 4).
1
return of 16.5% interest per year for the insured’s calculated life expectancy. (CR
397-398). The date on which the insured under the policy died set the date when
RV would be required to repay the loan with the interest. (CR 401).
RV did not sell any securities directly. Rather, it sold them through a
network of agents called “Licensees.” (2ndSuppCR 202, 207; 215-228; 229-230;
231-232). The Licensees received commissions of up to 18% on each sale they
made. (2ndSuppCR 205-206, 212; 232). The Licensees played a vital role in the RV
scheme, as they were the ones who convinced the victims to invest. Through the
Licensees, RV raised more than $77 million from more than 900 investors.
(2ndSuppCR 214). Appellant Senior Retirement Planners, LLC was a Licensee
owned by Appellant James Poe (collectively “Poe”). Poe stipulated he received all
of the $485,564.13 in commissions RV paid to Senior Retirement Planners, LLC.
(CR 1966-67). Collectively, the Licensees received more than $12 million in
commissions while the investor-victims didn’t receive a single penny. (2ndSuppCR
235). This suit was originally brought by the Texas Attorney General on behalf of
the Texas State Securities Board. The trial court granted the State’s motion for
partial summary judgment finding that RV had engaged in fraud or fraudulent
2
practices in the course of illegally selling unregistered securities and ordered RV
to make restitution to the investors. (CR 611-612).
RV Misrepresented the Potential Risks and Returns
To induce the investors to purchase the RSLIP, RV touted the investment as
safe and highly profitable promising to double the investors’ money with “double-
digit” returns. (CR 328; 539-563). It claimed it would reserve sufficient funds in
separate escrow accounts for each policy to pay premiums for two years beyond
the insured’s life expectancy as calculated by a reputable and highly skilled
medical underwriter, Midwest Medical Review (“Midwest”). (CR 477, 482; 461-
462) RV assured investors that there was a 95% chance that the insured would
die on or before the life expectancy date calculated by Midwest (2ndSuppCR 835;
5thSuppCR 488) and a less than 2% chance that the insured would live more than
12 months beyond the Midwest life expectancy. (CR 482; 2ndSuppCR 835). See
also, (5thSuppCR 241-253; CR 549). 2
2
Receiver requested a supplement to the record for additional exhibits to the Sabban Affidavit
which were inadvertently omitted by the clerk of the trial court that has not yet been filed.
Those exhibits are Sabban Aff., Ex. B-14, Ex. 2; Ex. B-16, at TSSB 50025; Ex. B-16, at TSSB
050023.
3
The life expectancy calculation is the key variable in determining the
success or failure of a life settlement investment. As the court in SEC v. Mutual
Benefits Corp., 408 F.3d 737 (11th Cir. 2005), explained:
The purchaser of the viatical settlement realizes a profit if, when the
insured dies, the policy benefits paid are greater than the purchase
price, adjusted for time value. Thus, in purchasing a viatical
settlement, it is of paramount importance that an accurate
determination be made of the insured's expected date of death. If
the insured lives longer than expected, the purchaser of the policy
will realize a reduced return, or may lose money on the investment.
Id. at 738. As Dick Gray, the President and principal owner of RV acknowledged,
the life expectancy calculation drives the price of the policy, the reserves needed
to pay anticipated premiums and the desirability of the investment. (CR 576, 580-
581, 582-584).
The investment was highly risky and far more likely to lose money than to
make money for the investors. RV’s representations as to the low risk of the
investment due to the accuracy of Midwest were wholly false. A life expectancy is
not the point in time in which an insured is expected to have died, as RV
represented. Instead, it is the point at which 50% of the people who are
statistically similar to the insured are expected to have died and 50% are expected
to remain alive. (CR 403, 421-423). See also, (5thSuppCR 519-522). At life
4
expectancy (assuming it is calculated correctly), there is only a 50/50 chance that
an insured will have died. Id. This is a far cry from the 95/5 chance claimed by RV.
In this manner, RV significantly overstated the likelihood that it would be
able to repay the money it borrowed plus the promised return. The leadership of
RV knew full well that RV was misrepresenting what Midwest’s calculations
meant. After all, they had the full Midwest report which directly disclosed that
Midwest’s calculations were a median and directly contradicted RV’s statements
about the calculations. (CR 421-422). RV intentionally hid this most critical part of
the Midwest report when it was sent to investors. (5thSuppCR 233, 343-471, 524-
527; CR 505, 362-364, 372-374, 377).
RV made these misrepresentations purposefully in order to make the
investment saleable. RV’s COO explained that RV could not attract investors if it
had to disclose that there was only a 50/50 chance that the insured would die at
the life expectancy. He wrote:
Here’s a mental picture.
You’re sitting at a kitchen and going over the presentation. You’re
[sic] prospect asks “do you have any statistics (a look back is fine) to
support your LE projections?” “I sure do Mr. Prospect. Our look back
confirms we’re at 50/50. No better than a coin toss; is that OK?”
5
“Perfect!” says Mr. Prospect. “Write me up!” Needless to say you
would politely be shown the door.
(CR 463). He later explained to Gray that disclosure that the life expectancy
represented just a 50/50 chance of death would not “be[] a selling point, it would
cause significant head wind.” (5thSuppCR 473). RV was quite aware that investors
would want to know that Midwest was providing only an estimate of the time
needed to reach a 50/50 chance – a coin toss, in Collins’ words – of the insured’s
mortality. (CR 367-368).
It gets worse. In the course of its investigation, the State obtained life
expectancy calculations by 21st Services and AVS Underwriting, LLC, two well-
established and reputable providers, on many of the persons insured under
policies owned by RV. Comparison of their calculations to those by Midwest show
that the life expectancies calculated by 21st and AVS, on the same individuals
generated at or about the same time, were about 2½ times longer than the
Midwest calculations used by RV. (CR 220-221). At the time that it was using
Midwest, RV understood that Midwest’s life expectancy calculations were roughly
half as long as those by every other life expectancy provider. (CR 576-579). RV
chose Midwest instead of the reputable providers precisely because its life
6
expectancies were half as long as industry standard in order to understate the
required premium reserves. (CR 378-379; 210, 241). When asked why RV did not
use a reputable provider than Midwest, Gray testified: “We could have, but it
wouldn’t have worked. … Because the longer the LE [life expectancy], the more
you have to escrow premiums.” (CR 576). See also, (5thSuppCR 480). Thus, the
scheme was doomed to failure from the beginning. (2ndSuppCR 234-235).
Far from being reputable as RV claimed, Midwest was operated by a
convicted felon who had falsely represented that he was a medical doctor and
been indicted on 21 counts involving fraud and conspiracy. (5thSuppCR 127-179,
75-88). While RV was using Midwest, Midwest was facing accusations by the SEC
in a lawsuit that it had participated in a different, “fraudulent scheme” involving
life settlements by providing life expectancies that were “unreliable” and much
too short thereby increasing the risk “policies may lapse from lack of funds to
make premium payments.” (5thSuppCR 75-88). RV knew of the SEC’s accusations
against Midwest and its owner’s conviction. (5thSuppCR 491-511). It also knew
that investors and Licensees who learned of these facts balked at continuing a
relationship with RV. Id. See also, (5thSuppCR 504, 482, 512, 516; CR 368-369,
7
378-380, 606-607). Moreover, the Texas Department of Insurance had warned RV
that continuing to sell investments based on life expectancy calculations issued by
Midwest would be grounds for disciplinary action. (5thSuppCR 516).
RV Misused Premium Reserves
RV promised investors would be protected from any malfeasance of RV
because their funds reserved for the premium payments would be held in
separate escrow accounts for each policy and they would be made irrevocable co-
beneficiaries of the policies. (CR 328, 477-479; 2ndSuppCR 454, 457). These
alleged protections were crucial to RV’s marketing of the RSLIP. (CR 594, 596).
These too were lies. There was no escrow – RV retained full control over
the funds held by the alleged escrow agent which it used to funnel increasing
amounts of money to James Settlement Services at the expense of funding the
premium reserves. (CR 387-388, 489-497, 215-216; 5thSuppCR 525-527, 529-530).
In addition, RV routinely used funds set aside for one policy to pay expenses
related to other policies. (CR 216, 217-220, 316-321). As a result of this
commingling, RV had underfunded the premium reserves by about $3 million. (CR
220, 323, 404, 532). Contrary to its promise, whenever RV needed money to pay
8
an expense related to a policy, it pulled funds from whatever account it could find
them in regardless of their intended use. (CR 313-314). The Receiver has
documented at least 84 instances where RV paid for a policy using funds reserved
for other policies. (CR 216-217). The commingling was so extensive, it was not
possible to trace the investment by any particular investor to the purchase of any
particular policy. (2ndSuppCR 63). Dick Gray testified that commingling of this
sort was a routine practice “from the very beginning.” (CR 598). As Dick Gray
noted, the problem simply got worse as RV continued to sell investments. (CR
534). None of the policies had sufficient premium reserves to pay premiums up
to life expectancy, much less to the life expectancy plus 24 months RV had
promised. (2ndSuppCR 243) In fact, most had less than half the required reserves
to pay premiums to life expectancy. (2ndSuppCR 245).
RV was aware of the significance of its use of premium reserves to purchase
policies and the corresponding failure to maintain proper reserves. (5thSuppCR
531). See also, (5thSuppCR 533). In an effort to hide the shortfall, RV postponed
the year-end audit it has promised investors. (5thSuppCR 533-535).
9
RV’s Model Would Not Work
There were many other intentional misrepresentations made by
Retirement Value. Poe himself devoted 32 pages in his response to the motion
for summary judgment detailing 72 separate fraudulent misrepresentations RV
made. (CR 1372-1404).
The combination of (1) ignoring the fact that the life expectancy was only
the median (2) purposefully using unreliable life expectancies that were 2.5 times
shorter than industry standard, and (3) the shortfall in the reserve accounts
caused by RV’s misuse of the funds, meant RV’s premium reserves were woefully
inadequate to hold the policies in force like RV had promised they would be.
(2ndSuppCR 234). RV’s model was insolvent from the beginning and, as
structured, could not have reached solvency. (2ndSuppCR 234-235). The only way
the Receiver could keep RV afloat was to disregard RV model of each policy
standing on its own. Instead, he had to combine all the policies into a common
fund whereby the proceeds received from policies that matured first could be
used to pay premiums on the ones that had not matured. (2ndSuppCR 55-59). As
Gray testified, “it wouldn’t have worked” without Midwest. (CR 576). The
Receiver determined RV’s model had “zero chance of success.” (2ndSuppCR 56).
10
SUMMARY OF THE ARGUMENT
Those, such as Poe, who actively participate in fraudulent schemes are not
entitled to retain their ill-gotten gains under a very long line of cases.
A receiver serves in a dual capacity, which enables the Receiver to bring
suits both on behalf of the receivership entity (such as for breach of fiduciary
duty) and on behalf of creditors (such as for fraudulent transfers). Poe is not
entitled to a credit for the James settlement for three independently sufficient
reasons: (1) there were separate damages for separate injuries caused to
separate parties, (2) Poe was not found jointly and severally liable, and (3) the
settlement agreement segregated the damages.
Poe's objections to the Espinosa and Burchett affidavits are without merit,
as both were well-qualified to give the opinions they did and they properly relied
on the valuation work Lewis & Ellis did on the policies. The affidavits are quite
lengthy and spell out the basis for their opinions in great detail. Moreover, there
is no reversible error as the portions of the affidavits and exhibits thereto Poe did
not object to contain more than sufficient evidence to uphold the judgment.
11
The Receiver presented overwhelming evidence that the transfers to Poe
were fraudulent as a matter of law under a long, long line of similar cases. Those
cases are not limited to Ponzi schemes. Poe’s arguments are just that. He has no
evidence, and his arguments are both factually and legally flawed.
ARGUMENT
ISSUE 1: SETTLEMENT CREDITS
1. Standard of review.
Poe incorrectly asserts the standard of review on this point is de novo. (Br.
p. 14.) “We review the trial court's decision to apply a settlement credit for an
abuse of discretion. A trial court abuses its discretion when it acts without
reference to guiding rules or principles.” Metal Bldg. Components, LP v. Raley,
2007 WL 74316, at *18 (Tex. App. – Austin 2007, no pet.) (citations omitted). See
also, Utts v. Short, 2004 WL 635342, at *3 (Tex. App. – Austin 2004, pet. denied);
Texas Capital Sec., Inc. v. Sandefer, 108 S.W.3d 923, 925 (Tex. App. – Texarkana
2003, pet. denied); Ramsey v. Spray, 2009 WL 5064539, at *2 (Tex. App. – Fort
Worth 2009, pet. denied); LJ Charter, LLC v. Air America Jet Charter, Inc., 2009 WL
4794242 *7 (Tex. App. – Houston [14th Dist.] 2009, pet. denied). “[S]tated
12
another way, [the question is] whether its decision was arbitrary or unreasonable.
Weighing the evidence with respect to the amount of the settlement credit
involves the exercise of the trial court's discretion, and the trial court will not be
held to have abused its discretion if some evidence reasonably supports its
decision.” Whatley v. Lindeman, Inc., 2005 WL 291469, at *4 (Tex. App. – San
Antonio 2005, pet. denied) (citations omitted).
2. Argument
The Receiver sought damages for two distinct injuries in this case. The first
injury was caused by the fraudulent transfer of funds from RV to defendants as
their individual “take” from the scheme. The Receiver identified precisely how
much each individual took, and sued that individual for the return of that money.
(CR 705-06). In Poe’s case, that was $485,654.13. (CR 705). That was the amount
of commissions he received for recruiting investor victims into the scheme. In
James’ case, it was the $19-20 million he overcharge RV for the policies by using
the artificially short Midwest life expectancies. (CR 706-707). The claims the
Receiver brought to recover for these injuries and the resulting damages were for
violations of TUFTA separately against each individual defendant. (CR 705-08).
The Receiver did not seek joint liability on these claims (the “separate
13
damages”). 3 (CR 707-08). The Receiver identified the specific bag of money each
defendant received, and only sought the return of the money from the defendant
that received it. In Poe’s case that was the return of his commission, and in
James’ case it was the return of the excess he charged RV for the policies over
their true value. (CR 705-708). At no point did the Receiver seek to hold James
jointly liable with Poe for his commissions, or Poe jointly liable with James for the
overcharges. (CR 705-08).
The second injury was caused by RV being ordered to pay restitution to the
victims of the RV scheme. (CR 691). The claims the Receiver brought to recover
for this injury and the resulting damages were for aiding and abetting and
conspiracy to breach fiduciary duties. (CR 691) The Receiver did seek joint
liability on these claims (the “joint damages”). (CR 691).
The separate damages were distinct from the joint damages. They were to
separate measures of damage designed to remedy two different and distinct
injuries. Moreover, the injuries were to two separate parties. One injury involved
3
Some of the Licensees set up companies that received the commission directly from RV, and
then passed the money through to the individual. In Poe’s case, he set up Senior Retirement
Planners, LLC which passed all the commission onto him. (CR 1966-1967). In such instances,
the Receiver sued both the company and individual, as both transferees are liable under TUFTA.
14
the breach the duty under TUFTA owed to creditors. The other injury involved
the breach of fiduciary duty owed to RV. The separate damages relate to the
former, and joint damages the later. The purpose of the separate damages was
to compensate creditors for harm done to them, while the purpose of the joint
damages was to compensate RV for harm done to it. The Receiver was acting in
two separate capacities in bringing this suit. See, Akin, Gump, Strauss, Hauer &
Feld, L.L.P. v. E Court, Inc.,2003 WL 21025030, at *5 (Tex. App.—Austin 2003, no
pet.). In one capacity, he was bringing the TUFTA claims seeking separate
damages for the benefit of creditors. In the other capacity, he as brining the
fiduciary duty claims for the benefit of RV. There is no way that the separate
damages under TUFTA and the joint damages for breach of fiduciary duty result
from an indivisible injury. They represent compensation for injuries to two
different parties arising from two distinct and separate duties. See, Christus
Health v. Dorriety, 345 S.W.3d 104, 114 (Tex. App.—Houston [14th Dist.] 2011,
pet. denied) (Rejecting application of one satisfaction rule and applying an abuse
of discretion standard, the court held: “The one-satisfaction rule applies to
prevent a plaintiff from obtaining more than one recovery for the same injury.
The rule applies when multiple defendants commit the same act as well as when
15
defendants commit technically different acts that result in a single injury. This
case, however, involves two meaningfully different injuries, and two separate and
distinct victims of different acts of malpractice: (1) the injuries to Timothy during
his birth, which caused a life-long mental handicap, and (2) the injuries to Melissa
resulting from Christus's negligence, which caused her death. The 1984
settlement compensated Timothy for the things he can no longer do for himself;
the 2009 judgment compensated Timothy for the things that Melissa can no
longer do for him.”) (citations omitted); Reservoir Sys., Inc. v. TGS-NOPEC
Geophysical Co., L.P., 335 S.W.3d 297, 309 (Tex. App.—Houston [14th Dist.] 2010,
pet. denied) (Ruling one satisfaction rule was not violated: “Here, TGS's remedy
for Reservoir's failure to repay the loan compensates TGS for its out-of-pocket
loss for the loan. TGS's remedy for Sigmar's fraud compensates TGS for a portion
of what it expected to receive based on Sigmar's representations regarding the
Pemex project. Because TGS suffered separate and distinct injuries and damages
from Sigmar's fraud and Reservoir's breach of contract, the trial court did not err
in awarding judgment on both causes of action.”)
“[T]he nonsettling defendant is entitled to offset any liability for joint and
several damages by the amount of common damages paid by the settling
16
defendant, but not for any amount of separate or punitive damages paid by the
settling defendant.” Crown Life Ins. Co. v. Casteel, 22 S.W.3d 378, 391-92 (Tex.
2000). Thus, Poe is only entitled to a settlement credit on damages he and James
are jointly liable for. “Under the one satisfaction rule, the nonsettling defendant
may only claim a credit based on the damages for which all joint torfeasors are
jointly liable.” Crown Life, 22 S.W.3d at 391. “The supreme court's decision in
Crown Life is controlling in this case and requires that settlement credits be
applied only if the parties were jointly and severally liable for the damages.” CTTI
Priesmeyer, Inc. v. K & O Ltd. P'ship, 164 S.W.3d 675, 685 (Tex. App.-Austin 2005,
no pet.).
In this instance, there was no joint liability. Courts look to the judgment
entered against the non-settling defendant in determining if there is joint liability
to apply a settlement credit to, not at the allegations that were made against the
nonsettling defendant in the pleadings. Crown Life, 22 S.W.3d at 391. See also, LJ
Charter, 2009 WL at *9 (Holding settlement credit should not be applied where
the plaintiff lost on its claim against nonsettling defendant alleging joint liability
with settling defendant when the court disregarded the verdict against the
17
nonsettling defendant on that claim). Poe acknowledges this when he says this
issue was preserved for appeal when he asked the trial court to apply the
settlement credits after Poe’s liability had been adjudicated, as opposed to by the
earlier motions he had filed. (Br. 19 & n. 8) His counsel argued the same thing at
the hearing. (RR v2 14) The trial court ruled on summary judgment that Poe was
not liable on the claim for joint damages. (CR 1974). Poe was only held liable for
his separate damages under TUFTA. Id. Poe is not entitled to a settlement credit
since he was not jointly liable with James for any damages.
Poe is improperly seeking a credit for a settlement of joint damages against
his separate damages. RV was ordered to pay restitution to investors in the
amount of $77.6 million. (CR 611-612). The judgment against Poe was for much
less than that amount, thus he would not be entitled to a credit even if the
damages assessed against him were for joint damages as he claims in his brief
since there has not been one satisfaction on the joint damages. “The [one
satisfaction] rule guards against a plaintiff receiving a windfall “by recovering an
amount in court that covers the plaintiff's entire damages, but to which a settling
defendant has already partially contributed. The plaintiff would otherwise be
18
recovering an amount greater than the trier of fact has determined would fully
compensate for the injury.” Osborne v. Jaugegi, Inc., 252 S.W.3d 70, 75 (Tex. App.
– Austin 2008, no pet.). There would be no windfall here. The Receiver would be
only 1/8th satisfied.
For the reasons discussed above, the damages against Poe are separate.
Poe is asking this court to apply a settlement credit from joint damages on which
has been judicially determined not to be liable for to the separate damage claim
against him, something that is clearly improper.
In addition to Poe, the Receiver obtained separate similar summary
judgments on its TUFTA claims against all other licensees who had not settled
with separate (not joint and several) damages awarded against each of them. The
Receiver had also brought a TUFTA claim against James seeking $19-20 million in
separate damages from him. The James settlement was credited against and
extinguished that claim for separate damages against James. If Poe were to claim
credit for it as well, then it would be double counted. If Poe could receive credit
for it, then under the same logic the other licensees with judgments (none of
which exceed the James settlement) against them could as well. That would
19
provide Poe a windfall, turn the one satisfaction rule on its head, and lead to an
absurd result.
The result that is consistent with the one satisfaction rule gives credit for
the James settlement on the joint damages and James’ separate damages. That
way the Receiver does not get a double recovery and Poe does not get a windfall
and remains liable for his separate damages.
Moreover, the language of the settlement agreement precludes Poe from
claiming a credit, even if there were joint damages, which there were not. “If the
nonsettling party meets its burden [to show a settlement], the burden shifts to
the plaintiff to tender a settlement agreement that allocates the settlement
between (1) damages for which the settling and nonsettling defendant are jointly
liable, and (2) damages for which only the settling party was liable.” Crown Life,
22 S.W.3d at 392. No magic words are required in the settlement agreement to
establish the Plaintiff’s intent on the allocation. 4 B.T. Healthcare, Inc. v.
Honeycutt, 196 S.W.3d 296, 298 (Tex. App. – Amarillo 2006, no pet.). The
4
Poe acknowledges this in his brief when he states: “Nowhere within the James Settlement
Agreement is there any language stating or implying that the James Defendants were paying
only for damages for which they James Defendants were solely liable . . . ." (Br. at 18) (emphasis
added)
20
language of the settlement agreement made it clear that it only related to the
damage claims against James, and no other parties: “In return for the Monetary
Consideration . . . Plaintiffs . . . release the James Parties and Beste 5 . . . . from any
and all claims . . . damages . . . which Plaintiffs . . . have against the James Parties
and Beste that were brought in Cause No. . . . . “ (CR 2025) (emphasis added). 6
Moreover, the settlement contains the following specific language that further
limits its scope to only those damage claims for which James was liable:
Nothing in this release language nor any other provision of this Agreement
is intended to release any claims Plaintiffs have against the Licensees, Wells
Fargo or any other party to the Lawsuit. Those claims are expressly and
specifically reserved. Except as expressly provided herein, there are no
third party beneficiaries to this Agreement.
(CR 2027).
Poe suggests that the Receiver could have met his burden by stating in the
settlement agreement that it only covered certain damages James was liable for.
(Br. 20-21) Instead, the Receiver chose to accomplish the same result by making
it crystal clear that nothing in the settlement agreement affected his claims
5
For brevity, the James Parties and Beste have collectively been referred to as James in this
brief.
6
The emphasized language distinguishes this agreement from the on in Honeycutt where the
scope of the settlement covered all claims in the suit, and was not limited to those against the
settling Defendant.
21
against the nonsettling defendants. Those are two different ways of saying the
same thing. Again, no magic words are required.
Point One should be overruled for three independently sufficient reasons:
(1) there were separate damages for separate injuries caused to separate parties,
(2) Poe was not found jointly and severally liable, and (3) the settlement
agreement segregated the damages.
ISSUE 2: OBJECTIONS TO AFFIDAVITS
1. Espinosa’s July 29, 2011 Affidavit
Poe first attacks the affidavit on the grounds Espinosa was not competent
to offer expert opinions on the value of RV’s assets and liabilities. Espinosa was
competent to testify about those values since, as Receiver he owned the assets
and liabilities. Reid Rd. Mun. Util. Dist. No. 2 v. Speedy Stop Food Stores, Ltd., 337
S.W.3d 846, 852-53 (Tex. 2011); Sierad v. Barnett, 164 S.W.3d 471 (Tex. App.
2005).
Poe next claims those portions of the affidavit on the value of the assets
and liabilities are conclusory. Even a cursory review of the affidavit (which is 178
pages long including exhibits) shows it was far, far from conclusory. Poe attempts
22
to sensationalize his argument by incorrectly claiming the affidavit failed to
explain while policies with face values totaling $130 million were worth $5
million. Espinosa’s affidavit included a copy of his report to the court which
explained in detail for three pages why the policies were valued at that amount.
(2ndSuppCR 109-111). Espinosa’s report also included copies of two valuation
reports done by Lewis & Ellis on the policies. (2ndSuppCR 123-156). The Receiver
hired Lewis & Ellis to advise him on the value of the policies so he could evaluate
the option of liquidating them to help pay restitution to the investors, not as
litigation experts. (2ndSuppCR 95). Those reports explain the rationale and
methodology for valuing the policies in great detail for six pages. (2ndSuppCR 128-
133, 146-151). Another expert hired by the Receiver, Asset Servicing Group to
administer the policies for him, concurred with choice of the discount rate Lewis
& Ellis used to value the policies. (2ndSuppCR 110, 143). Poe admits RV overpaid
for the policies in his response to the motion for summary judgment. (CR 1377).
It was entirely appropriate for Espinosa to base his opinions on this work done by
his experts. Miller v. Argumaniz, 2015 WL 595468 *3-4 (Tex. App. ̶ El Paso 2015,
mot. for extension of time to file pet. granted). Just like experts, lay opinion, and
particularly those considering an owner’s testimony about value, may be based
23
on hearsay such as appraisals. Natural Gas Pipeline Co. of American v. Justiss, 397
S.W.3d 150, 157-59 (Tex. 2012).
Poe also claims the affidavit is unreliable because Espinosa did not apply a
discount rate to RV’s liabilities. As discussed more fully below in connection with
the solvency analysis under TUFTA, the liabilities should not have been
discounted. In short, and as Burchett explained, the debts were not discounted
because the valuation was done as if the company was being liquidated, which
would necessarily entail the immediate payment of all liabilities. (2ndSuppCR
110). Moreover, Poe offered no expert or other evidence on what the claimed
accounting principles were, whether the liabilities should be discounted or what
the discount rate would be. Thus, he cannot show discounting the liabilities
would have made a difference in the court’s decision on solvency.
Lastly, Poe attacks Espinosa’s discussion of the inadequate premium
reserves in paragraphs 34-37 of his affidavit (2ndSuppCR 65-67). Poe only partially
challenges that fact by objecting to paragraphs 34-37 of Espinosa’s July 29, 2011
affidavit, and paragraph 7 of the his May 1, 2013 affidavit (2ndSuppCR 232). Poe
complains Espinosa was unqualified to opine that the life expectancy calculations
24
performed by Midwest were too short. He was qualified based on the personal
knowledge he gained about Midwest in the course his role as Receiver for RV.
Both his affidavit, and his reports which are exhibits to his affidavit show that. He
owned the policies and the reserve accounts in his capacity as Receiver.
Moreover, the premium reserves were $14.2 million short even using the bogus
Midwest life expectancies. 7 (2ndSuppCR 65). As discussed above, RV knew the
premiums reserves were short. In any event, Espinosa’s affidavit 8 contained clear
and unequivocal reports and other evidence, which Poe did not object to, from
undisputed experts on life expectancies done on the same policies by (1) two
more reputable life expectancy companies, (2) a life expectancy company hired by
the receiver to conduct independent calculations, and (3) a report from an expert
commissioned by RV prior to the receivership to examine the life expectancies.
(2ndSuppCR 107-109, 139). All of those show the life expectancies performed by
Midwest were way too short. Poe himself argued in his response to the motion
7
The shortfall in the premium reserve is even worse because RV represented that it would
reserve sufficient funds to pay premiums on each policy for the life expectancy plus 24 months,
by which time it represented the insured on that policy had a greater than 98.5% chance of
dying. (2ndSuppCR 112). In truth, the life expectancy is the point at which 50% of the insureds
will have died. Id. The shortfall was further compounded by the fact that RV failed to take into
account the fact that the premiums required to keep the policies in force would increase every
year. (2ndSuppCR 113).
8
Similar evidence was contained in Espinosa’s report, which was not objected to. (2ndSuppCR
111-113).
25
for summary judgment that the life expectancies prepared by Midwest were
unreliable. (CR 1376).
Poe also points to the fact that RV was only obligated to have premium
reserves for the estimated life expectancy plus 24 months, but ignores the poof
that RV did not have reserves for the estimated life expectancy plus 24 months,
because, among other things, it raided the premium reserves to pay for new
polices and routinely purchased policies without having the promised premium
reserve. (2ndSuppCR 62, 91). On top of that, the unchallenged evidence
established RV had pervasively commingled the premium reserve accounts in
contravention of its promises to investors to the contrary, and even used
premium reserves for existing policies to purchase new policies. (2ndSuppCR 62-
64, 91). Finally, the report from Lewis & Ellis, which Poe did not object to,
attached to Espinosa’s affidavit and also to Burchett’s affidavit establishes that
not a single policy had sufficient reserves to maintain the policy in force for the
insured’s life expectancy. (2ndSuppCR 131).
Lastly, Poe stated in his response to the motion for summary judgment that
(1) “[t]here was an ever-increasing short-fall in the premium accounts,” (2) “[b]y
26
the end of 2009, there was a massive ($2 million) shortfall in the premium
accounts,” and (3) “[f]unds were commingled from the outset.” (CR 1371). Later
in the response, he stated “there were massive short-falls in the premium
accounts due to the undisclosed commingling and misapplication of funds on
deposit.” (CR 1375). He is no position to dispute these facts now.
2. Espinosa’s July 29, 2011 Affidavit
Poe’s only objection to this affidavit is a repeat of his objection that
Espinosa did not set out his qualification to testify as an expert on the premium
reserves. That claim was addressed above.
3. Burchett May 1, 2013 Affidavit
Poe first objects that Burchett’s affidavit did not set out his qualifications to
testify as an expert on the value of insurance policies. Burchett was
unquestionably competent to testify on the issue of solvency since he was a CPA.
(2ndSuppCR 296-303; 233). In re Rodriguez, 204 B.R. 510, 514 (Bankr. S.D. Tex.
1995), aff'd, 95 F.3d 54 (5th Cir. 1996). Burchett explained in his affidavit: “I
relied on the valuations of RV’s life insurance policies as performed by Lewis &
27
Ellis, Inc., Actuaries and Consultants, for assessing the market value of these
assets. These records are of a type that are reasonably relied upon by experts in
my field in forming opinions.” (2ndSuppCR 234). Burchett’s affidavit also includes
copies of those reports, which Poe did not object to. (2ndSuppCR 234-236, 237-
271). Burchett’s reliance on Lewis & Ellis report was entirely proper. .
Experts on solvency typically rely on other experts, such as real estate appraisers
and others to determine the fair value of the debtor’s assets. The impressive
qualifications of Lewis & Ellis are set out in its reports and in the biographies of
the principals who did the work. 9 (2ndSuppCR 132, 152, 267-271).
Poe next complains Burchett’s affidavit did not set out his qualifications to
determine discount rates for assets and liabilities. CPA’s, such as Burchett, are
obviously qualified to determine such discount rates. In any event, this is a non-
issue, since Lewis & Ellis valued the policies (using a discount rate they
9
In summary, Lewis & Ellis is an actuarial consulting firm that has been in business for over 40
years, has offices in Dallas, Kansas City, London and Baltimore and was performing life
settlement portfolio valuations on 10 + life settlement portfolios ranging from 2 policies to
1,100 policies at the time of its report. (2ndSuppCR 128, 132). The Lewis & Ellis principals who
prepared the report had many years of experience and were Fellows of the Society of Actuaries
and Members of the American Academy of Actuaries and one of them had served as a Board
Member of the Life Insurance Settlement Association for nearly five years. (2ndSuppCR 132).
28
determined was proper) and no discount rate was applied to the liabilities for the
reasons discussed above.
Poe also argues Burchett’s affidavit should be disregarded as unreliable based
on the 20% discount rate applied when valuing the policies. Lewis & Ellis
explained that discount rate in their report where they stated it was carefully
chosen based on the valuations they had done on many policy portfolios ranging
in size from two to 1,100 policies, their experience with those funds, their
knowledge of the market and the then-current discount rates used in the market
when policies are bought and sold. (2ndSuppCR 242). Lewis and Ellis chose the
discount rate, not Burchett. Poe did not object to the Lewis & Ellis report
attached to either Espinosa’s or Burchett’s affidavit. Poe offered no expert of his
own. Thus, this evidence is uncontroverted.
Poe also points out that Burchett failed to discount the liabilities. That was
entirely proper for the reasons briefly stated above and explained more fully
below. Burchett did not admit in his deposition that a fair valuation of RV’s debts
required application of the same or a similar discount rate as was applied to the
assets like Poe says he did citing 2ndSuppCR 762. In any event, Burchett
29
explained, correctly, that the debts were not discounted because the valuation
was done as if RV was being liquidated. (2ndSuppCR 758).
4. No Reversible Error
Having no experts of his own, Poe has not created a fact issue nor can he
show reversible error. “Lay testimony is insufficient to refute an expert’s
testimony.” Anderson v. Snider, 808 S.W.2d 54, 55 (Tex. 1991). Arguments of
counsel certainly are.
In fact, there is plenty of evidence on the valuation of the policies and RV’s
insolvency apart from the few portions of the affidavits Poe objects to that will
support the judgment. For instance, Poe did not object to any of the reports from
Espinosa, Burchett, or Lewis & Ellis attached to the affidavits. Moreover, either
affidavit on its own is enough as well. Those are other reasons there is no
reversible error here.
Even if the objections to the affidavits were valid (which they are not), RV’s
liabilities still exceeded its assets by $40 million even if the policies were valued
based under the investment method which would include the purchase price,
30
acquisition costs, premiums paid to date as well as all other capitalized expenses.
(2ndSuppCR 122). Additionally, there is a balance sheet for RV that shows RV’s
liabilities exceeded its assets, even without the adjustments Poe complains about.
Id. See also, (2ndSuppCR 127) (showing assets exceeding liabilities each month).
Poe’s focus solely on the value RV’s assets and liabilities is fundamentally
misplaced in any event. All of this evidence relates to the solvency analysis under
TUFTA 24.006(a). Insolvency is not a requirement under the Receivers’ claims
under three other TUFTA provisions, as explained below.
Point Two should be denied as the affidavits were proper, and there was no
reversible error in any event.
ISSUE 3: THERE WERE NO FACT ISSUES
The Receiver brought fraudulent transfer claims under four separate TUFTA
provisions - §§24.005(a)(1), 24.005 (a)(2)(A)&(B) and 24.006(a). The judgment
can be affirmed under any of them.
§24.005(a)(1)
31
A transfer is fraudulent to a present or future creditor if the transfer was
made “with actual intent to hinder, delay or defraud any creditor of the debtor.”
TUFTA §24.005(a)(1).
RV has been found to have committed securities fraud. (CR 611).
Therefore, it has already been determined as a matter of law (based on the
evidence set out above plus much more) that RV intended to defraud investors
through a fraudulent scheme. The investors were indisputably creditors, both by
virtue of their loans to RV and their claims against RV for securities fraud. TUFTA
§24.002(3)(4)&(5). Thus, each transaction whereby Poe was paid a commission
was necessarily done with the intent to hinder, delay or defraud any creditor of
RV. Defrauding the investors was the very core of RV. As part of the fraudulent
scheme, money was transferred from RV to Poe for his role in luring investors.
These transfers were fraudulent under Section 24.005(a)(1) because they were
made with actual intent to defraud creditors. See Janvey v. Alguire, 846
F.Supp.2d 662 (N.D. Tex. 2011) (receiver properly asserted a claim against
employees of Stanford International Bank for fraudulent transfer under TUFTA
32
where the Stanford Defendants transferred investors’ funds to employees with
actual intent to hinder, delay or defraud creditors).
The evidence of actual intent is overwhelming. The facts set out in the
beginning of this brief prove RV intentionally lied to investors in many respects
about the returns they could expect and the safety of their investment. Dick Gray
told his key lieutenants and Licensees in a recorded conference call:
The model has grown so quickly that in the buying of policies, the
disbursement of client funds, I would describe as a leaning – a financial
Leaning Tower of Pisa. That's another way of saying, if somebody came in
right now from a regulator and took a photograph of our operation and all
the bottom lines and all numbers and all the policy and all the subaccounts,
they would call us a Ponzi scheme.
(2ndSuppCR 439-440). In addition, it is undisputed that (1) RV had been told by all
three separate lawyers it hired that it was illegally selling an unregistered security
(2ndSuppCR 775, 844-45, 893), (2) RV was constantly worried about being caught
by the regulators and tried to “stay under the radar” and use “legal double-talk”
because RV knew it would “hit the fan” when RV was discovered (2ndSuppCR 704,
770, 821, 893), (3) RV was using the premium reserve accounts to finance its
“cash shortfall” which was causing “very deep professional concerns” (2ndSuppCR
791, 870), and (4) RV’s leadership discussed the importance of not putting
33
anything incriminating in emails for fear of future subpoenas, with one saying “if
you don’t have it in writing, I never said it.” (2ndSuppCR 925).
Proving that a debtor operated as a Ponzi scheme proves actual intent to
hinder, delay, or defraud any creditor or debtor required by TUFTA §24.005(a)(1).
Janvey v. Alguire, 647 F.3d 585, 598 (5th Cir. 2011). Poe’s first challenge to this
claim is to allege that the case the Receiver relied on below involved a Ponzi
scheme, and he claims RV was not a Ponzi scheme. (BR p. 61) Poe does not cite a
single case holding that such a distinction makes a difference. There are two fatal
flaws in Poe’s argument. The first is that court found, as a matter of law, and the
evidence cited in this brief indisputably proves that the creditors (investors) were
defrauded. Thus, whether it was a Ponzi scheme or not doesn’t matter. Intent to
defraud is determined on a case by case basis and can be proven by
circumstantial evidence. TUFTA §24.005(b); Walker v. Anderson, 232 S.W.3d 899,
914 (Tex. App.—Dallas 2007, no pet.). A Ponzi scheme is not required. 10
10
In re Bell & Beckwith, 64 B.R. 620, 629 (Bankr. N.D. Ohio 1986), involved the diversion
of client funds for personal use rather than a Ponzi scheme. When analyzing whether transfers
could be set aside as having been made “with actual intent to hinder, delay, or defraud” a
creditor in violation of Section 548(a)(1) of the Bankruptcy Code, the court reasoned:
Although the funds for the horse racing enterprise were not necessarily spent by
Wolfram with the intent to defraud the customers, the availability of those funds was
34
The second fatal flaw in Poe’s response is the rule that proving the transfer
was made as part of a fraudulent scheme proves actual intent to hinder, delay, or
defraud any creditor or debtor required by TUFTA §24.005(a)(1) is not limited to
Ponzi schemes. “The Fifth Circuit and other circuits have repeatedly held that the
existence of a fraudulent scheme itself is sufficient to find that a transfer made in
furtherance of that scheme was made with fraudulent intent. Indeed, in a
fraudulent scheme, all transfers made in furtherance of the fraudulent scheme
are inherently made with fraudulent intent.” In re IFS Financial Corp., 417 B.R.
419, 439 (Bkrtcy. S.D. Tex. 2009), aff’d, 669 F.3d 255 (5th Cir. 2012) (applying Texas
law) (citations omitted). The court in IFS Financial refused to even consider
whether the scheme involved in that case was a Ponzi scheme, because it said:
“The Fifth Circuit’s reasoning applies whether the organization neatly fits within a
judicially constructed definition of Ponzi scheme or was a fraudulent scheme that
had some, but perhaps not all, attributes of the traditional Ponzi scheme. When
an organization perpetuating a fraud makes a transfer necessary for continuation
accomplished by and is the product of a deliberate fraud. Therefore, any disposition of
those funds must be considered to be part of a continuing course of conduct which was
intended to defraud the customers of the Debtor. Based upon these facts, it is evident
that the elements of Section 548(a)(1) were present at the time the transfers in
question were made. Accordingly, it must be concluded that they are avoidable under
Section 548(a)(1) and recoverable under Section 550.
35
of the fraud, the transfer is made with actual intent to defraud.” Id. at n. 15. The
Fifth Circuit agreed with this holding when it affirmed that case: “Evidence that a
company operated as a fraudulent enterprise at the time of the transfer,
moreover, may be sufficient to establish actual intent.” In re IFS Financial Corp.,
669 F.3d 255, 265 (5th Cir. 2012) (emphasis added). The court in In Re Cowin, 492
B.R. 858, 902 (Bkrtcy. S.D. Tex. 2013), also applying Texas law, held that the
existence of a conspiracy which did not involve a Ponzi scheme was evidence of
fraudulent intent under TUFTA. Similarly, the court in BAC Home Loans Servicing,
LP v. Texas Realty Holdings, LLC, 2010 WL 3522981 *3 (S.D. Tex. 2010), adopted,
2010 WL 3522980 (S.D. Tex. 2010), held that the fact that the defendant was
running a non-Ponzi scheme was “strong evidence of her actual intent to defraud”
under TUFTA. Other jurisdiction agree. 11 As these cases demonstrate, there is no
meaningful distinction between a Ponzi scheme and securities fraud scheme in
the context of analyzing intent to hinder, delay or defraud creditors. Both are
illegal schemes that fundamentally grounded in fraud from the very beginning.
11
See also, Cobalt MultiFamily Investors I, LLC, 2010 WL 3791040 *3 (securities fraud
that was a non-Ponzi scheme constituted fraudulent intent under uniform fraudulent transfer
act); Scholes v. African Enterprise, Inc., 838 F.Supp. 349, 353, 356 (N.D. Ill. 1993) (principle's
mental state to actually defraud investors is sufficient to establish requisite mental state under
uniform fraudulent transfer act);
36
In addition, this case had many of the same characteristics of a Ponzi
scheme. 12 “Courts presume actual intent in relation to a Ponzi scheme because
the debtor knows at the time of the transfer that the scheme ultimately must
12
RV knew it was illegally selling unregistered securities, was doing all it could to dodge the
regulators, was plotting strategy to hide evidence for when it got caught, promised grossly high
returns on a safe investment, was insolvent from the beginning and got progressively more
insolvent with each investment, commingled and misused investor funds, made many
fraudulent misrepresentations to investors, admitted there was no way its model would work
without the bogus life expectancies of Midwest, and paid excessive profits to the owners and
participants. RV was never profitable. (2ndSuppCR 278) In fact, the losses grew as more
policies were sold. (2ndSuppCR 279-291) Other than a negligible initial capital investment of
$1,000, RV was solely funded by money from investors. (2ndSuppCR 234). Investor funds were
then used to buy policies, pay premiums, give Licensees commissions, pay operating costs, and
make sizeable distributions to management. Id. Gray and others associated with RV, including
his son, even called RV a Ponzi scheme and “financial Leaning Tower of Pisa.” (2ndSuppCR 438-
440, 441, 447, 454, 457). The only way to keep RV afloat would have been from the use of
funds from future investors. (2ndSuppCR 234). Frankly, the only reason it didn’t turn into a
situation where current investors were paid money from new investors as in a classic Ponzi
scheme is due to the good work of the TSSB and AG shutting RV down before more investors
could be fleeced.
The evidence before the bankruptcy court on the question of the debtors' intent
consisted of the affidavit of Ron N. Bagley, the original trustee and trustee Merrill's
accountant. That evidence shows that the debtors conducted no business operations,
never generated any profits or earnings, paid all monthly disbursements to undertakers
solely from other undertakers' investments, were insolvent from the moment the first
investment contract was executed, became more insolvent with each successive
contract, and ran their business as a Ponzi scheme. In addition, the Bagley affidavit sets
out fourteen material representations—many of them allegedly false—that the debtors
made regarding the nature of their business and the nature of the investments to
induce undertakers to invest in the program. None of the defendants introduced any
evidence to dispute the assertions in the Bagley affidavit. Thus, it was undisputed that
the debtors' business “was conducted as a ‘Ponzi’ scheme....” 41 B.R. at 994.
In re Indep. Clearing House Co., 77 B.R. 843, 860 (D. Utah 1987).
37
collapse.” In re Nat'l Consumer Mortgage, LLC, 2013 WL 164247, at *11 (D. Nev.
Jan. 14, 2013). The same was definitely true of RV.
Poe also claims the investors were not “creditors” with “claims” before or a
reasonable time after the transfers because the investors’ loans had not matured.
(Br. 61) That is wrong for two reasons. First, the definition of “claim” under
TUFTA provides: “’Claim’ means a right to payment or property, whether or not
the right is reduced to judgment, liquidated, unliquidated, fixed, contingent,
matured, unmatured, disputed, undisputed, legal, equitable, secured, or
unsecured.” TUFTA § 24.002(3) (emphasis added). Including unmatured debt in
the solvency analysis has been the law in Texas for at least 125 years. See, Burnett
v. Chase Oil & Gas, Inc., 700 S.W.2d 737, 743 (Tex. App. 1985, no writ); Frees v.
Baker, 81 Tex. 216, 16 S.W. 900, 901 (1891). See also, Sherrod v. City Nat. Bank of
Wichita Falls, 294 S.W. 295, 296 (Tex. Civ. App. – Amarillo 1927, writ ref’d)
(judgments rendered after the fraudulent transfer are to be considered on issue
of solvency at time of transfer).
Second, the investors were also creditors with claims by virtue of the
securities fraud as of the date the fraud was committed, which was when they
38
initially invested. The definition of a “claim” includes a right to payment “whether
or not the right is reduced to judgment, liquidated, unliquidated, fixed,
contingent, matured, unmatured, undisputed . . . . .” TUFTA §24.002(3). See also,
Duran v. Henderson, 71 S.W.3d 833, 841 (Tex. App.—Texarkana 2002, pet. denied)
(“As the statutory definitions make clear, the Hendersons did not need to obtain a
judgment against Charles Duran for conversion, which they in fact eventually did,
in order for him to become a debtor to them within the meaning of the statute.”).
This identical issue was addressed by the court in In re Bayou Grp., LLC, 439 B.R.
284 (S.D.N.Y. 2010), which also involved an illegal investment scheme. The
transferees argued that “case law does not support treating liabilities for which
the debtor is not legally bound to pay at the valuation date as ‘debts' for purposes
of insolvency.” Id. at 334. The court rejected this argument because the tort
claims of the investors were founded on fraudulent misrepresentations made at
the time of initial investment. Id. at 335. “[I]t is a given . . . that the [investment
company] had a legal tort liability to their investors for the full amount of their
investments based on rescission for fraud. As such, the investors were and are
creditors.” Id. Based on the fact that “in tort cases the relationship of debtor and
creditor arises the moment the cause of action accrues,” the court held that the
39
“investors' claims accrued at the moment of the fraudulent inducement and
therefore were liabilities of” the investment company from that time and were
properly counted as such in the solvency analysis. Id. at 335. See also, S.E.C. v.
Antar, 120 F. Supp. 2d 431, 443 (D.N.J. 2000) aff'd, 44 F. App'x 548 (3d Cir. 2002)
(summary judgment entered for fraudulent transfer on basis of insolvency when
transfers occurred years before judgment for securities fraud); In re Ramirez,
2011 WL 30973, at *4 (Bankr. S.D. Tex. 2011) (debt arose when tort was
committed). The definition for “claim” and “debt” under the bankruptcy code is,
in all relevant respects, identical to the one in TUFTA. Compare, TUFTA
§24.002(3) & (5) with 11 USC §101(5) & (12). In fact, the TUFTA definition was
taken from the bankruptcy code. Unif.Fraudulent Transfer Act § 1 comment 3.
Lastly, Poe asserts the Receiver has failed to show that the transfers to Poe
were made with intent to defraud. As discussed above, since RV was operating a
fraudulent scheme, all transfers (including the ones to Poe) are made with
fraudulent intent as a matter of law.
The Fifth Circuit and other circuits have repeatedly held that the existence
of a fraudulent scheme itself is sufficient to find that a transfer made in
furtherance of that scheme was made with fraudulent intent. Indeed, in a
40
fraudulent scheme, all transfers made in furtherance of the fraudulent
scheme are inherently made with fraudulent intent.
In re IFS Fin. Corp., 417 B.R. at 439 (citations omitted). “When an organization
perpetuating a fraud makes a transfer necessary for continuation of the fraud, the
transfer is made with actual intent to defraud.” Id. at 439 n. 15. The payments of
commissions to sales agents was necessary for RV to continue its fraud. They are
the only ones who sold its product.
The law is clear – a receiver may recover sales commissions that were paid
for luring investors into an illegal and fraudulent investment scheme (as well as
payments to employees of the fraudulent enterprise), and the Receiver is
regularly granted summary judgment on those claims. Janvey v. Alguire, 647 F.3d
585; Janvey, 846 F.Supp.2d at 674; S.E.C. v. Cook, 2001 WL 256172 *2 (N.D.
Tex.,2001) (granting summary judgment to receiver under Texas law); MultiFamily
Investors I, LLC v. Lisa Arden, 2010 WL 3791040 *3 (S.D.N.Y. 2010), adopted, 2010
WL 3790915 (S.D.N.Y. 2010); Hays v. Adams, 512 F.Supp.2d 1330, 1333-34 (N.D.
Ga. 2007) (granting summary judgment for receiver); Klein v. Patterson, 2013 WL
3776266 *3 (D. Utah 2013) (granting summary judgment for receiver); Cobalt
Multifamily Investors I, LLC v. Arden, 2012 WL 3838834 *6 (S.D.N.Y. 2012); Gordon
41
v. Dadante, 2010 WL 4137289 * 2 (N.D.Ohio 2010); Scheck Investments, L.P. v.
Kensington Management, Inc., 2009 WL 1916501 *4 (S.D.Fla. 2009); Wuliger v.
Mann, 2005 WL 1566751 *9 (N.D.Ohio 2005).
§24.005(a)(2)(A) & (B)
A transfer is fraudulent to a present or future creditor if the transfer was
made “without receiving a reasonably equivalent value in exchange for the
transfer or obligation, and the debtor: (A) was engaged or was about to engage in
a business or a transaction for which the remaining assets of the debtor were
unreasonably small in relation to the business or transaction; or (B) intended to
incur, or believed or reasonably should have believed that the debtor would
incur, debts beyond the debtor’s ability to pay as they became due.” TUFTA
§24.005(a)(2).
The transfers to Poe were fraudulent because RV was engaged in a business
or transaction for which the remaining assets of the debtor were unreasonably
small in relation to the business or transaction. (2ndSuppCR 234); TUFTA
§24.005(a)(2)(A). RV was insolvent at all times, meaning that “the sum of RV’s
debts was greater than all of RV’s assets.” (2ndSuppCR 234-235; 278). Having
42
promised to pay each investor 16.5% simple annual interest and reserve
premiums for life expectancy plus 24 months, RV lacked any reasonable amount
of assets to actually fulfill that promise. (2ndSuppCR 234). Burchett’s affidavit
stated that his review of RV’s books and records proved RV’s “management paid
out all of the available cash soon after it came in, leaving it insolvent and unable
to meets its obligations.” (2nd Supp. 233) Burchett’s affidavit also stated:
“Actually, RV became more and more insolvent with each transaction that
management entered into in its name. After management took their cut, the
Licensees took their cut, the James parties took their cut, and Kiesling Porter took
it’s cut, there was not enough money left to pay premiums with which to keep
the policies in force. Because of this way of managing the business, RV was left
owing more money than it could possibly pay.” (2ndSuppCR 234) This
unchallenged proof is more than sufficient to prove the transfers to Poe violated
TUFTA separate and apart from any alleged errors in valuing the policies, or
liabilities. As discussed above, RV’s model was based on the intentional
misinterpretation of the Midwest life expectancy and using Midwest instead of a
reputable provider in order to get life expectancy numbers that were half as long
as they should have been. There was no way the RV model would work.
43
In addition, the transfers were fraudulent because RV intended to incur, or
believed or reasonably should have believed that it would incur debts beyond
RV’s ability to pay as they became due. TUFTA §24.005(a)(2)(B). Gray’s belief in
this regard was evident when he described RV as a Leaning Tower of Pisa that the
regulators would call a Ponzi scheme. Here again, the knowing misuse of the
Midwest life expectancies made it impossible for the RV business model to work.
Gray even admitted it would not work without Midwest, which he clearly knew
was providing bogus life expectancies. There was no way for RV to pay its debts
as they came became due. Id. (2ndSuppCR 234). In addition to constant and
worsening insolvency, when the Receiver took over, RV had a $3 million shortfall
in the policy premium accounts as a result of commingling. (2ndSuppCR 55; 65;
168). The payments to Licensees were fraudulent because each transaction
made RV more and more insolvent and allowed it to incur debts beyond RV’s
ability to pay. (2ndSuppCR 234-235). TUFTA §24.005(a)(2)(B).
The Receiver’s proof clearly supported a summary judgment.
Proof that transfers were made pursuant to a Ponzi scheme generally
establishes that the scheme operator “[w]as engaged or was about to
engage in a business or a transaction for which the remaining assets of the
debtor were unreasonably small in relation to the business or transaction,”
44
§ 3439.04(a)(2)(A), or “[i]ntended to incur, or believed or reasonably should
have believed that he or she would incur, debts beyond his or her ability to
pay as they became due,” § 3439.04(a)(2)(B).
Donell v. Kowell, 533 F.3d 762, 770-71 (9th Cir. 2008). The rationale that
“compels” this rule is that Ponzi schemes are insolvent from their inception, and
so too was RV. In re Canyon Sys. Corp., 343 B.R. 615, 650 (Bankr. S.D. Ohio 2006)
(granting summary judgment). “The fact that the debtor operated primarily if not
exclusively on fraudulently obtained funds establishes that the debtor had little if
any legitimate operating capital. Id. Other than a negligible initial capital
investment of $1,000, RV was solely funded by money fraudulently obtained from
investors. (2ndSuppCR 234). It’s model would not work.
Poe argues that the transfers to him must have been what caused the
remaining assets of RV to be unreasonably small or caused RV to incur debts
beyond its ability to pay as they became due. By their plain language, neither of
these TUFTA provisions require such a causal link. TUFTA §24.005(a)(2)(A)&(B)
As a matter of law, Poe did not provide reasonably equivalent value. “To
measure reasonably equivalent value, we judge the consideration given for a
transfer from the standpoint of creditors. The proper focus is on the net effect of
45
the transfers on the debtor's estate, and the funds available to the unsecured
creditors.” In re TransTexas Gas Corp., 597 F.3d 298, 306 (5th Cir. 2010). The
relevant comment in UFTA states that the definition of “value” is:
[A]dapted from § 548(d)(2)(A) of the Bankruptcy Code.... The definition [ ]is
not exclusive [and] is to be determined in light of the purpose of the Act to
protect a debtor's estate from being depleted to the prejudice of the
debtor's unsecured creditors. Consideration having no utility from a
creditor's viewpoint does not satisfy the statutory definition.
Unif. Fraudulent Transfer Act § 3 cmt. 2 (emphasis added). From a creditor’s
viewpoint, RV lost the money it paid Poe and it incurred debts to investors it had
no realistic chance of repaying. “The primary consideration in analyzing the
exchange of value for any transfer is the degree to which transferor’s net worth is
preserved. It takes cheek to contend that in exchange for the payments he
received, the RDI Ponzi scheme benefited from his efforts to extend the fraud by
securing new investments.” Warfield v. Byron, 436 F.3d 551, 560 (5th Cir. 2006)
(affirming summary judgment for Receiver). Because the debtor's business was
inherently illegitimate, the broker's services, which furthered the scheme, had no
value as a matter of law. It made no difference whether those same broker
services would have been valuable to legitimate businesses in the marketplace or
46
that the broker was unaware of the fraud. Id. See also, In re Ramirez Rodriguez,
209 B.R. 424, 434 (Bankr.S.D.Tex.1997) (stating that “as a matter of law, the
Defendant gave no value to the debtors [Ponzi scheme operators] for the
commissions attributable to investments made by others”). The same logic
applies here. Each investment dollar the Poe brought into the illegal scheme
resulted in RV owing more money and becoming more insolvent. (2ndSuppCR
235). Thus, RV’s net worth harmed by the transfer.
Since Poe’s affidavit contains no evidence that his services preserved the value
of RV’s estate or had any utility from a creditor’s perspective, it does not create a
fact issue on reasonably equivalent value. Janvey, 780 F.3d at 646. Even if the
fraudulent scheme was disregarded, the money from investors was a loan to RV,
and created additional debt that RV had no hope of repaying thereby harming its
net worth and creditors.
§24.006(a)
A transfer is also fraudulent as to present creditors “whose claim arose before
the transfer was made or the obligation was incurred if the debtor made the
transfer or incurred the obligation without receiving a reasonably equivalent
47
value in exchange for the transfer or obligation and the debtor was insolvent at
the time or the debtor became insolvent as a result of the transfer or obligation.”
TUFTA § 24.006(a). The Receiver is not claiming RV became insolvent as a result
of the transfers to Poe.
The transfers to Poe were fraudulent because RV was insolvent at the time
and RV did not receive a reasonably equivalent value in exchange. TUFTA
§24.006(a). RV was insolvent at all times in that the sum of its debts was greater
than all of its assets at fair valuation. (2ndSuppCR 234-235). With each
investment procured by the Licensees, RV became increasingly insolvent.
(2ndSuppCR 235). Everyone – Licensees, Gray, and other Defendants – took
their cut at the beginning, leaving RV with the liability to pay investors as
promised. Every dime of investor money was already accounted for. Considering
that RV based its model on a intentional misreading of what the Midwest life
expectancies really meant, not to mention the fact that Midwest life expectancies
were less than half of what reputable life expectancies were, (2ndSuppCR 65-66),
RV did not have enough money to keep the policies in force. (2ndSuppCR 65;
234). As a result, for each dollar that was brought in, RV incurred additional
48
obligations it couldn’t repay. (2ndSuppCR 234-235). The RV model simply
wouldn’t work. In addition, the transaction that the investors entered into was
the product of securities fraud, and as a result, RV was required to repay all the
investors which further exacerbated the insolvency. (CR 611). As stated above,
there was no reasonably equivalent value provided for the commissions.
The Receiver presented overwhelming proof of RV’s insolvency at the time
of the transfers to Poe. The Receiver conducted a detailed and thorough analysis
of RV’s financial condition in hopes of paying the defrauded investors the
restitution they were entitled to. He could not do so because RV was insolvent.
The Receiver engaged an expert actuary with tremendous experience with life
settlements to value the policies RV had. He also engaged another life settlement
expert to help him manage the portfolio of policies. On top of that, he engaged a
well-respected accounting firm to thoroughly analyze RV’s finances, books and
records. The summary judgment proof of insolvency included the statements
made in the Receiver’s affidavits as well as the affidavit of his expert accountant,
Burchett which the court should review. They are included in the Appendix to this
brief.
49
Either of those affidavits standing alone was sufficient to prove RV was
insolvent as a matter of law. There are many portions of those affidavits that Poe
does not even attempt to challenge, including the reports and other documents
attached to them. For instance, Burchett’s report shows RV’s liabilities exceeded
its assets by $26,989.81 in its first month and that it became increasingly
insolvent each month until it was shut down in March 2010 with liabilities
exceeding assets by $8.5 million. (2ndSuppCR 277). That was before any of the
valuation adjustments Poe complains of. Id. Of course, the insolvency was much
higher when the policies were adjusted to their fair valuations. (2ndSuppCR 278)
Those unchallenged portions of the affidavits, standing alone, are sufficient to
prove RV was insolvent as a matter of law.
Significantly, Poe offers no real evidence on solvency himself.
Although it is Debtors' burden to demonstrate insolvency and provide
reliable expert testimony, Appellants cannot—in the face of the exhaustive
analysis conducted by an expert as qualified as Lenhart—credibly assert
fatal flaws in his analysis without supporting evidence of their own. The
conclusory statements contained in Appellants' briefs—without citation to
contradictory evidence or independent expert analysis—do not raise
material issues of fact as to the Bayou Funds' insolvency or the possibility of
conducting a solvency analysis on a non-aggregated basis
In re Bayou Grp., LLC, 439 B.R. at 336.
50
In his challenge to insolvency, Poe improperly seeks to (a) value assets at
face value instead of using a “far valuation,” (b) discount or completely ignore
RV’s debt, and (c) use the Receiver’s reorganization plan for repaying investors.
“A debtor is insolvent if the sum of the debtor’s debt is greater than all of
the debtor’s assets at a fair valuation.” TUFTA § 24.003(a) (emphasis added). Poe
is improperly valuing the insurance policies RV owned at their face value, not at
their fair value as the Receiver did and as required by TUFTA. In re Merry-Go-
Round Enterprises, Inc., 229 B.R. 337, 343 (Bankr. D. Md. 1999) (recipients of
fraudulent transferred offered no controverting evidence of solvency when they
presented balance sheets, as opposed to using a fair valuation). 13 Solvency is
determined from the creditor’s perspective. That is, does the creditor have
sufficient assets to sell and pay its debts. Fair valuation is not the book value, or
cost, usually reflected on the balance sheet. Rather, it is determined by
“estimating what the debtor's assets would realize if sold in a prudent manner in
13
The definition of insolvency, which is also contained in the Uniform Fraudulent Transfer Act
was taken from the bankruptcy code definition contained at 11 U.S.C.A. § 101(32). In re
Brentwood Lexford Partners, LLC, 292 B.R. 255, 268 (Bankr. N.D. Tex. 2003); Uniform Fraudulent
Transfer Act § 2 comment 1. TUFTA §24.012 provides: “This chapter shall be applied and
construed to effectuate its general purpose to make uniform the law with respect to the
subject of this chapter among states enacting it.” Accordingly, citations to bankruptcy cases
and cases from other states that adopted the uniform act are appropriate. Bowman v. El Paso
CGP Co., 431 S.W.3d 781, 786 n.6 (Tex. App. – Houston (14th Dist.) 2014, pet. denied).
51
current market conditions.” Matter of Lamar Haddox Contractor, Inc., 40 F.3d
118, 121 (5th Cir. 1994). Courts apply this meaning of “fair valuation” to TUFTA.
See, In re Brentwood Lexford Partners, LLC, 292 B.R. 255, 268 (Bankr. N.D. Tex.
2003); In re Pioneer Home Builders, Inc., 147 B.R. 889, 893 (Bankr. W.D. Tex.
1992).
Poe’s claim in his affidavit and argument stating that RV could pay the
investors back when the policies matured did not create a genuine issue of
material fact. It does not address fair valuation of the policies at all as required by
what courts call the balance sheet test in TUFTA § 24.003(a). Whether RV could
pay those debts when they came due (which it could not) is simply not the test.
All debts are to be counted in the solvency analysis, not just those currently due.
TUFTA § 24.003(a) (“A debtor is insolvent if the sum of the debtor’s debts is
greater than all of the debtor’s assets at fair valuation.”); In re Prince, 2012 WL
1095506, at *8 n. 7 (Bankr. E.D. Tex. Mar. 30, 2012) (“Under both Texas law and
the Bankruptcy Code, a debtor is insolvent if the sum of the debtor's liabilities is
greater than the sum of the debtor's assets at a fair valuation.”); Farmers Bank of
Clinton, Mo. v. Julian, 383 F.2d 314, 326 (8th Cir. 1967), cert. denied, 389 U.S.
52
1021 (1967) (“The test for ‘insolvency’ under . . . the Bankruptcy Act is not the
inability to meet current obligations but is the state of having liabilities exceed
assets.”). Engelkes v. Farmers Co-op. Co., 194 F. Supp. 319, 327 (N.D. Iowa 1961)
(It is to be noted that the definition of ‘insolvency’ appearing in the Bankruptcy
Act is a ‘balance sheet’ definition and requires the weighing of assets against
liabilities. It differs in this respect from the conventional definition of insolvency
which is ‘a general inability to meet pecuniary liabilities as they mature, by means
of either available assets or an honest use of credit.’). All debts are to be counted
in the solvency analysis, not just those currently due.
Poe’s argument is further flawed by the fact that he relies on the Receiver’s
reorganization plan to demonstrate RV could pay its debts as they came due.
That plan is not properly considered as part of the solvency analysis. “The
question of insolvency is to be determined as of the time of the conveyance.”
Jackson Law Office, P.C. v. Chappell, 37 S.W.3d 15, 25 (Tex. App. – Tyler 2000, pet.
denied). See also, TUFTA § 24.006(a) (A transfer is fraudulent if the debtor was
insolvent “at the time.”).
53
Poe’s argument that Burchett had no personal expertise in valuing life
settlements or computing life expectancies is irrelevant. As demonstrated above,
he properly relied on the work done by Lewis & Ellis. Burchett also interviewed
Lewis & Ellis to understand their work. (2ndSuppCR 753)
Burchett did not violate AICPA standards. Poe cites to 2ndSuppCR 756
which is Burchett’s deposition testimony on those standards. A review of his
testimony shows that Poe’s counsel was mixing apples (AICPA standards on
valuation) with oranges (AICPA standards on solvency). Burchett made it clear
that he had conducted a solvency analysis, not a valuation. (2ndSuppCR 755-56)
Therefore, the standards Poe’s counsel was relying on were inapplicable. Id.
Lewis & Ellis’ decision to apply a 20% discount rate when valuing the
policies was entirely appropriate, as explained in their report. As stated above, a
second firm hired by the Receiver to administer the policies concurred in the
choice of that discount rate. Poe offered no controverting evidence to show this
discount rate was inappropriate.
Poe next claims, without citation to any expert testimony or authority, that
the $77 million obligation to participants should have been discounted because
54
“these amounts are not payable until the death of the insureds, which is
projected to occur years in the future.” (Br. P. 52) Here again, Poe ignores the
fact RV was running a securities fraud scheme and the investors had current
claims for restitution because of the fraud committed against them. Even if the
tort liability is ignored, the obligations to investors under the RV contracts should
not have been discounted. TUFTA § 24.003(a); Julian, 383 F.2d at 326 (“The test
for ‘insolvency’ under . . . the Bankruptcy Act is not the inability to meet current
obligations but is the state of having liabilities exceed assets.”). In analyzing this
issue under the Bankruptcy Code definition of insolvency the TUFTA definition
was taken from, one court explained:
On the debt side of the insolvency equation under § 101(32)(A), the phrase
“at a fair valuation” does not modify the phrase “the sum of [the] entity's
debts.” See Trans World Airlines, Inc., v. Travellers International AG (In re
Trans World Airlines), 180 B.R. 389, 423–24 (Bankr.D.Del.1994) (relying on
plain language and noting the anomaly that would result if the insolvency
determination was premised on debts being fairly valued, i.e. insolvency
could never occur), reversed on this point, 203 B.R. 890, 897 (D.Del.1996),
affirmed on this point 134 F.3d 188, 196–97 (3d Cir.1998). Under the
Bankruptcy Code, debt is defined as “liability on a claim.” 11 U.S.C. §
101(12). A claim, in turn, is defined to as a “right to payment, whether or
not such right is reduced to judgment, liquidated, unliquidated, fixed,
contingent, matured, unmatured, disputed, undisputed, legal, equitable,
secured or unsecured; ....” Id. at § 101(5). Therefore, the sum of an entity's
55
debts is the sum of the entity's liability on each of its claims. An entity's
liability on a claim is the amount of the claim.
In re Merry-Go-Round Enterprises, Inc., 229 B.R. 337, 342 (Bankr. D. Md. 1999).
See also, In re ORBCOMM Global, L.P., 2003 WL 21362192, at *3 (Bankr. D. Del.
June 12, 2003); In re Trans World Airlines, Inc., 134 F.3d 188, 197 (3d Cir. 1998),
cert. denied (1998); In re Imagine Fulfillment Servs., LLC, 2014 WL 3867531, at *5
(B.A.P. 9th Cir. 2014). The definitions of “debt” and “claim” are the same under
TUFTA. TUFTA §24.002(3)&(5).
Burchett did not admit he should have applied the same discount rate to
the money owed investors as had been applied in valuing the policies. Rather,
Burchett’s response Poe points to was to a hypothetical situation counsel had
been discussing with him for several pages, and Burchett’s response was simply
“it’s possible, I’ll have to think about that, I have not considered that entirely.”
(2ndSuppCR 762). That hypothetical involved the sale of the liability at market
prices. (2ndSuppCR 762). That hypothetical was improper under In re Merry-Go-
Round Enterprises, Inc. and the other cases cited above. In contrast, when asked
specifically about the debt to the investors in RV as part of his solvency analysis,
Burchett testified unequivocally that it should not be discounted because
56
insolvency is a balance sheet test to determine whether the company could pay
its debts if liquidated. (2ndSuppCR 758). That testimony is entirely in line with the
cases just cited which specifically reject Poe’s claim that debts should be
discounted or valued at market value.
Poe complains that the statements in Espinosa’s affidavit that “RV is
insolvent” is conclusory. (Br. p. 54) The affidavit sets for the facts supporting that
statement in detail immediately following it; thus, it is not conclusory.
(2ndSuppCR 55) In addition to that, the affidavit contains many exhibits
supporting Espinosa’s opinion that RV was insolvent, as well as the report of
Burchett who Espinosa hired to evaluate RV’s solvency. The same is true for the
statement that “the market value of the assets [RV] holds is far less than its
debts” that Poe also objects to.
Next, Poe points to the section of Espinosa’s report where he says the value
of the policies could not be determined based on comparable sales. (Br. p. 55)
That doesn’t matter, because there are other ways of valuing policies or similar
assets, such as the income approach which was used here. “The three traditional
approaches to determining market value are the comparable sales method, the
57
cost method, and the income method.” City of Harlingen v. Estate of Sharboneau,
48 S.W.3d 177, 182 (Tex. 2001). In fact, the very next sentence of Espinosa’s
report states: “Instead, policies are valued based on the net present value of
their anticipated cash flows.” (2ndSuppCR 728). Espinosa then details how that
calculation was performed and attaches the Lewis & Ellis report. (2ndSuppCR 728-
29).
The rest of Poe’s arguments concerning Espinosa’s affidavit are based on
the Receivers’ reorganization plan and the face value of the policies, which have
been addressed above.
The Receiver’s Standing
Poe’s challenge to the Receiver’s standing is baseless. Receivers in Texas
have standing to bring the exact type of TUFTA claims against sales agents the
Receiver brings here.
Generally, a receiver has no greater powers than the corporation had as of
the date of the receivership. See Guardian Consumer Fin. Corp. v.
Langdeau, 329 S.W.2d 926, 934 (Tex.Civ.App.-Austin 1959, no writ).
However, when the receiver acts to protect innocent creditors of insolvent
corporations ... the receiver acts in a dual capacity, as a trustee for both the
stockholders and the creditors, and as trustee for the creditors he can
58
maintain and defend actions done in fraud of creditors even though the
corporation would not be permitted to do so. Id.; accord Shaw v. Borchers,
46 S.W.2d 967, 968-69 (Tex. Comm'n App.1932, judgm't adopted).
Akin, Gump, 2003 WL at *5 (emphasis added). Thus, the Receiver had standing to
bring the breach of fiduciary duty claims on behalf of RV as well as the TUFTA
claims on behalf of the creditors in his dual capacity. This has been the law in
Texas since at least 1932 up through the present. 14
The statement Poe claims was a judicial admission was not. The Receiver
was plainly asserting in the summary judgment motion that he has standing to
recover on the claims he brings, and the partial statement the Licensees refer to is
simply a metaphorical way of driving home the point that the Licensees continue
to hold stubbornly onto their ill-gotten gains.
To qualify as a judicial admission, a statement must be (1) made in the
course of a judicial proceeding; (2) contrary to an essential fact for the party's
14
See, Wheeler v. American Nat. Bank of Beaumont, 162 Tex. 502, 503, 347 S.W.2d 918, 919
(Tex. 1961); Sec. Trust Co. of Austin v. Lipscomb County, 180 S.W.2d 151, 158 (Tex. 1944); Shaw
v. Borchers, 46 S.W.2d 967, 968-69 (Tex. Comm'n App. 1932, judgment adopted); Cotten v.
Republic Nat. Bank of Dallas, 395 S.W.2d 930, 941 (Tex.Civ.App.-1965, writ ref’d n.r.e.); Wheeler
v. American Nat. Bank of Beaumont, 162 Tex. 502, 503, 347 S.W.2d 918, 919 (Tex. 1961);
Guardian Consumer Fin. Corp. v. Langdeau, 329 S.W.2d 926, 934 (Tex. Civ. App. – Austin 1959,
no writ); Glenn H. McCarthy, Inc. v. Knox, 186 S.W.2d 832, 837-38 (Tex.Civ.App.-Galveston 1945,
writ ref’d); English Freight Co. v. Knox, 180 S.W.2d 633, 640 (Tex.Civ.App.-Austin 1944, writ ref’d
w.o.m.).
59
recovery; (3) deliberate, clear and unequivocal; (4) related to a fact upon which
judgment for the opposing party could be based; and (5) enforcing the admission
would be consistent with public policy. A true judicial admission is a formal waiver
of proof usually found in pleadings or the stipulations of the parties.
The attorney's opening argument, which is not evidence in the case,
constitutes no more than a forceful and persuasive summary of the
Federation's case. The Federation does not argue that the contracts state
that the supplement is “permanently irrevocable.” These general
statements delineating what “this case is about” are not deliberate, clear,
and unequivocal statements. We further note that these statements are
unsworn. The policy underlying judicial admissions is to prevent a party
from recovering after he has sworn himself out of court. Judicial
admissions are a formal act, and the doctrine should be applied with
caution.
Weslaco Federation of Teachers v. Texas Educ. Agency, 27 S.W.3d 258, 263 (Tex.
App.-Austin 2000, no pet.) (citations omitted). See also, Field v. AIM Management
Group, Inc., 845 S.W.2d 469, 472 (Tex. App.-Houston [14th Dist.] 1993, no pet.)
(“Judicial admissions which determine an ultimate issue must be made of sterner
stuff . . . “). Statements mistakenly made by counsel are not judicial admissions.
In re Dillard Dept. Stores, Inc., 181 S.W.3d 370, 376 (Tex.App.-El Paso 2005, no
pet.), citing, DeWoody v. Rippley, 951 S.W.2d 935, 946 (Tex.App.-Fort Worth
1997, writ dism'd by agr.).
60
The court should deny Point Three. There is overwhelming evidence to
support the TUFTA claims, or any one of them, and the Receiver had standing to
bring those claims.
PRAYER
Receiver prays that the judgment of the trial court be in all things affirmed.
In the alternative, the case should be remanded for further proceedings.
Respectfully submitted,
George, Brothers, Kincaid
& Horton, L.L.P
/s/ John W. Thomas
_______________________________
John W. Thomas
State Bar No. 19856425
114 W Seventh, Suite 1100
Austin, TX 78701-3015
Telephone: (512) 495-1400
Facsimile: (512) 499-0094
jthomas@gbkh.com
ATTORNEYS FOR APPELLEE, EDUARDO S.
ESPINOSA, IN HIS CAPACITY AS RECEIVER
OF RETIRMENT VALUE, LLC.
61
CERTIFICATE OF COMPLIANCE
I certify that this brief was produced on a computer using Microsoft Work
and contains 13,647 words, as determined by the computer software’s word-
count function, excluding the sections of the brief listed in Texas Rule of Appellate
Procedure 9.4(i)(1).
/s/ John W. Thomas
John W. Thomas
CERTIFICATE OF SERVICE
I hereby certify that a true and correct copy of the foregoing pleading was
served upon the following listed counsel by the Court’s electronic service and
pursuant to Rule 21a, Tex. R. Civ. P. , on this 13th day of July, 2015.
Scott Lindsey
Gardner Aldrich, LLP
1130 Fort Worth Club Tower
777 Taylor St.
Fort Worth, TX 76102
slindsey@gardneraldrich.com
/s/ John W. Thomas
John W. Thomas
62
03-14-00518-CV
IN THE COURT OF APPEALS
FOR THE THIRD DISTRICT OF TEXAS
AT AUSTIN
James Poe and Senior Retirement Planners, LLC
APPELLANTS
v.
EDUARDO S. ESPINOSA, IN HIS CAPACITY AS
RECEIVER OF RETIREMENT VALUE, LLC APPELLEE
Appeal from 200th Judicial District Court of Travis County, Texas
(Hon. Gisela D. Triana, Presiding)
APPELLEE’S APPENDIX
I. Espinosa’s July 29, 2011 Affidavit [2ndSuppCR 53-68]……………….……...….Tab 1
A. Espinosa July 28, 2010 Report [2ndSuppCR 70-100]………….………. Tab 2
B. Espinosa April 30, 2011 Report [2ndSuppCR 102-139]...….………… Tab 3
C. Lewis & Ellis, Inc. Reports [ 2ndSuppCR 123-156] …….….……………. Tab 4
D. Espinosa July 29, 2011 Affidavit Exhibits. D – K ………….…….……… Tab 5
II. Burchett May 1, 2013 Affidavit [2ndSupp CR 233-272]………………..……. Tab 6
A. Ex. B Burchett Report [2ndSuppCR 273-279] ………………….………. Tab 7
B. Burchett Report Exhibits [2ndSuppCR 280-477] ………….………….. Tab 8
63
TAB 1
CAUSE NO. D-1-GV-10-000454
STATE OF TEXAS, § IN THE DISTRICT COURT OF
§
Plaintiff, §
§
v. §
§
RETIREMENT VALUE, LLC, §
RICHARD H. "DICK" GRAY, IITLL §
COUNTRY FUNDING, LLC, a §
Texas Limited Liability Company, § TRAVIS COUNTY, TEXAS
HILL COUNTRY FUNDING, a Nevada §
Limited Liability Company, and §
WENDY ROGERS, §
§
Defendants, §
§
AND §
§
NJESLING,PORTER,KIESLING,& §
FREE,P.C., §
§
Relief Defendant. § 126th JUDICIAL DISTRICT
AFFIDAVIT OF EDUARDO S. ESPINOSA
BEFORE ME, the undersigned authority, on this day personally appeared Eduardo S.
Espinosa, who is personally known to me, and after being duly sworn according to law, upon
his/her oath duly deposed and said:
l. My name is Eduardo S. Espinosa. I am over the age of twenty-one (21) years, of
sound mind, and fully competent to testify in this cause. I have personal knowledge of the facts
stated herein, all of which are true and correct.
2. I am a partner in the law firm ofK&L Gates, LLP. I was admitted to practice law
in the State of Louisiana in 1996 and in the State of Texas in 1999. Prior to entering private
practice, I was an Enforcement Attorney with the United States Securities and Exchange
EXHIBIT
I 1 53
TAB 1
Commission, where I investigated violations of and enforced the antifraud provisions of the
federal securities Jaws.
3. The Court appointed me as the receiver for Retirement Value, LLC, a Texas
limited liability company ("Retirement Value"), and the assets derived there from ofRichard H.
"Dick" Gray ("Gray") and Bruce Collins ("Collins") pursuant to the First Amended Temporary
Restraining Order and Order Appointing Receiver entered on May 5, 2010 (as extended as to all
Defendants on May 12, 2010 and as extended as to Collins on June 2, 2010, (the "First
Amended TRO") in the cause numbered D-1-GV-10-000454 and styled State of Texas v.
Retirement Value, LLC, Richard H "Dick" Gray, and Bruce Collins, Defendants, and Kiesling,
Porter, Kiesling, & Free, P.C., Relief Defendant, in the 1261h District Court of Travis County,
Texas (the "Retirement Value Lawsuit").
4. I continue as the court-appointed receiver for Retirement Value and Gray's assets
derived therefrom pursuant to the Agreed Temporary Injunction Order against Defendants
Retirement Value LLC and Richard H. "Dick" Gray and the Relief Defendant and Order
Appointing Receiver entered on May 28, 2010 (the "Agreed TI") in the Retirement Value
Lawsuit.
5. Initially, the First Amended TRO and now, the Agreed TI directs me to, among
other things: take control of the property, assets, books, records, and the physical premises of
Retirement Value; conduct and manage the business affairs of Retirement Value; notify investor-
victims; assist the State Securities Board and the Attorney General with their investigations of
the Defendants' violations of the Securities Act and other laws of the State ofTexas and to effect
fair restitution, if possible, from the assets under my control according to a plan to be approved
by the Court.
2
54
6. As directed in the Agreed TI, I have completed a diligent investigation into the
identity of investor-victims, the amounts they paid to Defendants Retirement Value or Gray, any
amounts already paid by Defendants Retirement Value or Gray to the investor-victims, and the
circumstances under which their dealings with Defendants Retirement Value or Gray arose. The
results of my investigation are detailed in my Initial Report of July 28, 2010 and in my Report of
April30, 2011. Both reports have previously been filed with the Court. For convenience, I am
attaching copies of each report to my affidavit (Exhibits A and B, respectively). The copy of the
Initial Report attached to this affidavit does not have the exhibits attached as they are
voluminous and already part of the Court's record.
7. Retirement Value is insolvent. The market value of the assets it holds is far less
than its debts. Retirement Value owes $125.1 million in debt. Almost all of this debt is owed to
the investors -- $77.6 million in principal and $47.2 million in interest. It also owes about
$100,000 to various vendors and other trade creditors. In addition, Retirement Value faces a
claim for employment discrimination as well as other unliquidated claims. To pay these debts
Retirement Value has approximately $29 million in cash and a portfolio of policies with an
estimated liquidation value of$5.7 million.
8. Retirement Value also holds claims against its members, licensees and others. It
has reached tentative agreements to settle its claims against Dick Gray and Kiesling Porter.
These settlements are anticipated to generate approximately $1.3 million in cash and assets.
While Retirement Value remaining claims are meritorious, it is not possible to estimate their
value at this time.
9. Retirement Value had planned to repay its debt to the investors (or at least
represented that it would do so) by holding the policies in its portfolio to maturity and using the
3
55
proceeds of the policies to pay the investors. Retirement Value's initial plan has zero chance of
success. It needs approximately $42.7 million in additional reserves just to get each policy to the
insured's life expectancy- the point at which the insured as a 50/50 chance of having died. As
it stands currently, no policy has sufficient reserves to keep it in force until life expectancy.
Most policies are significantly under-reserved and many policies either have already exhausted
their reserves or will run out in just a few months.
10. Simply holding the policies and attempting to keep them in force through maturity
using only the funds reserved for each policy will not work. Even worse, attempting to do so
will deplete the estate, leaving it unable to pay the investors at alL The portfolio must be either
restructured or liquidated.
11. The first option is simply to liquidate the portfolio and to pay the proceeds of the
sale of the policies plus any remaining cash to the creditors. Liquidation has the virtue of being
quick and relatively inexpensive. A sales process designed to maximize the sales price should
take approximately six to twelve months, depending on the level of interest. The portfolio is in
good shape for sale currently. Each of the policies is in force, has a current illustration and a
current life expectancy calculation from a reputable source. We have already received several
unsolicited expressions of interest in the portfolio and anticipate that by soliciting offers we
could have a number of potential offers within a reasonable period of time. The primary expense
would be the premiums necessary to keep the policies in force until sale.
12. The downside of liquidation is that it will return relatively little value for the
portfolio. The fair market value for the policies is between $4.3 million and $7.1 million. Using
the middle value of$5.7 million plus the cash and other assets on hand, sale of the estate's assets
would yield approximately $35 million dollars in distributable cash. With over $77 million in
4
56
claims, that means that the estate would only be able to return approximately 45% of each
investor's initial investment to them. In effect, liquidating the portfolio locks in the loss
associated with the difference between the purchase price paid by Retirement Value for the
portfolio and its actuarial value.
13. How the funds will be distributed- either on a pro rata basis or on a policy by
policy basis - does not impact the total return to the investors as a group from liquidation. It
does, however, have a significant impact on the distribution of funds among the investors. Under
a pro rata method, all investors will recover equally based on the amount invested. Under a
policy by policy method, some investors will recover more than 44%; others will recover much
less. Who recovers what, depends on the market value of the policies a particular investor
invested in and the reserves actually maintained for that policy. Under the policy by policy
method, whether an investor participated in policy PLI140 will also play a significant role as
PLI140 investors would recover more than investors who did not invest in PLI140.
14. The second option is to hold the policies to maturity distributing the net proceeds
after payment of premiums and other expenses to the investors. The option will take longer to
pay out as it requires waiting for the policies to mature. However, it will recover significantly
more than liquidation. After analyzing the Portfolio, L&E has determined that if the Receiver
administers the estates' assets as single Portfolio, then the Portfolio is expected to yield $77.9 in
cash for the investors at maturity, an amount sufficient to repay 100% of the amount invested.
Statistically speaking, there is: (i) a 68% probability that the cash available for the investors will
be between $70 million and $85 million (returning between 91% and 110% of the investors'
initial investment) ; and (ii) a 95% probability that the cash available for the investors will be
between $62.5 million and $92.5 million (returning between 81% and 120% of the investors'
5
57
initial investment) L&E Revised Valuation Report dated June 27, 2011 attached as Exhibit C to
my affidavit.
15. Under this option, all of the assets of the estate would be available to pay
premiums on all of the policies in the Portfolio. When a policy matures, the proceeds of the
policy will be used to pay premiums on the policies that have not matured. Since the life
expectancy of each insured is a median, some of the policies should mature prior to their stated
life expectancy and some will mature after their stated life expectancy. The policies that mature
early will generate proceeds that the estate can use to pay the premiums for policies that have yet
to mature. By using all of the available cash to pay premiums as they become due, the estate can
disregard the significant and often imminent shortfalls in the reserve accounts to maintain all of
the policies in force and realize their maturity.
16. Managing the Portfolio in this manner requires significantly less cash at the onset
than attempting to manage the portfolio on a policy by policy basis. Because proceeds from
maturing policies can be used to pay future premiums, the estate need not reserve 100% of its
future cash obligations. Instead, it can rely on statistical probabilities to determine its probable
cash requirements. Based on the 100,000 scenarios modeled by L&E, Retirement Value needs
only $19.9 million in cash on-hand to have adequate resources to pay premiums in 97.5% of the
scenanos.
17. An incidental benefit of a single Portfolio is an enhanced ability to manage the
on-hand cash. As currently structured, the Receiver has 50 bank accounts, one for each policy's
premium reserves and a cash account. Each account's cash balance must be maintained
segregated, liquid and available to pay the premiums for the corresponding policy. This results
in a significant amount of cash sitting idle at a fmancial institution. At the simplest of levels,
6
58
consolidating the portfolio allows for the deposits to be consolidated and deposited in various
CD's with staggered terms structured to mature in accordance with the estate's cash needs. The
estate could thus avail itself of the higher interest rates that are available for longer term deposits
without exposing its assets to additional financial risk.
18. The hold strategy works only if Retirement Value's assets are treated as a single
portfolio and managed for the proportionate benefit of all investor victims. Attempting to retain
the policy by policy structure envisioned by Retirement Value and hold the policies to maturity
is simply not possible. No policy has sufficient reserves to maintain the policy in force for the
insured's life expectancy. Thus, each policy has less than (often, significantly less than) a 50/50
chance of maturing before the premium reserves are exhausted. If we attempted to hold the
policies to maturity without consolidation, the most likely result would be that a handful of
policies would mature and the remaining policies would exhaust their reserves and lapse. In
other words, a few investors would recover a small portion of their investment but that most
would recover nothing. If the portfolio is not consolidated so that each investor shares on a pro
rata basis, the only prudent course is to liquidate.
19. To that end, I have proposed a Plan of Distribution that contains the following
points:
• The investors will be paid on a pro rata basis up to the amount of their claims, as
funds become available for distribution. No investor has an interest in or
entitlement to the proceeds of any particular policy.
• The investors will have priority over the general creditors (e.g., trade creditors).
• Investor claims will be valued on a "net investment" basis - dollars invested less
dollars received from Retirement Value. This will have a limited effect on the
majority of investors but reduces the claims of investors who also happen to be
licensees by the amount of the commissions received.
• I will publish a schedule of claims. Only those claimants (i) whose claims are
scheduled as disputed; (ii) whose claims are not scheduled or (iii) who dispute the
7
59
amount or classification of their claim will need to take further action by filing a
proof of claim. Proofs of claim must be filed by a bar date, to be set by the Court.
The overwhelming majority of claimants will not need to do anything to preserve
their claim.
• As policies mature and portfolio variables in the model become known, I will
periodically review the portfolio cash reserves, and make distributions of excess
cash flows, when on-hand cash exceeds the forecasted reserve requirements.
• Reserve levels will be maintained at levels equal to the necessary premium
reserves calculated at the 97'li percentile in the most recent stochastic model
prepared by the estate's actuaries plus a reserve for expenses and contingencies.
• There will be an initial distribution of $7.7 million payable in 2011. Further
distributions will be made as excess net cash flow funds become available.
I solicited comments on the Plan of Distribution from the Intervenors and other investors as well
as the State. I also posted the Plan on the Receivership website.
20. I anticipate making further distributions in the future. As maturities occur, I
expect that cash on hand will exceed the reserves necessary to keep the policies in force. At
those points, I will make additional distributions. The frequency and amount of future
distributions will depend upon the timing of future maturities and recoveries from claims
asserted by the Estate.
21. The Plan that I have proposed provides the best likelihood of paying the most
money to the most investors. It treats all investors equally with no investor or group of investors
prevailing over the others. It is also in line with how Retirement Value actually operated its
business (as opposed to how Retirement Value represented it would do so). Retirement Value
treated the policies it held as a single portfolio taking funds as needed from various reserve
accounts to purchase policies unconnected to those accounts.
22. In the course of my investigation of the business affairs of Retirement Value, I
personally interviewed several Retirement Value employees, including without limitation, Gray
on May 6, 2010, and Wendy Rogers ("Rogers") on May 7, 2010. Further, my agents interviewed
8
60
several Retirement Value employees, including without limitation Carie Morales ("Morales") on
May 11, 2010. I have also reviewed numerous documents and other records I or my agents
found in Retirement Value's offices located at 707 N. Walnut, New Braunfels, Carnal County,
Texas as well as records stored on Retirement Value's computers.
23. Among the records I reviewed were QuickBooks accounting files maintained by
Retirement Value and by Kiesling Porter Kiesling & Free, PC ("KPKF"), who acted as the
nominal escrow agent for Retirement Value's Resale Life Insurance Policy Program ("RSLIP").
I also reviewed bank records, wire transfer instructions, payment instructions and escrow release
instructions evidencing the movement of funds among the accounts maintained by KPKF on
behalf of Retirement Value and the transfer of funds from KPKF to Pacific Northwest Title,
which acted as the escrow agent pursuant to the policy purchase agreements between Retirement
Value and James Settlement Services. I also reviewed accounting records provided by Pacific
Northwest Title. All of these records have been produced to the parties. Because ofthe size of
these records, I have summarized relevant portions of them in this affidavit.
24. In my review of these records, I identified 84 instances where Retirement Value
instructed KPKF to pay for a policy using funds reserved for other policies. I also identified
numerous instances where Retirement Value allowed James Settlement Services to direct Pacific
Northwest to use funds directed to the purchase of one policy for the purchase of a different
policy. As an example, Retirement Value sent in excess of $4 million to Pacific Northwest on
account of policy PLI140-1111 09-DM. Of those funds, only $2.36 million was applied to that
policy. In addition, there were a number of accounts at Pacific Northwest which had positive
balances even after the policy had been paid in full and delivered. In other instances, Pacific
9
61
Northwest applied more to a given policy than the stated purchase price or than Retirement
Value sent on account of that policy.
25. I also discovered that Retirement Value routinely directed KPKF to deliver funds
to Pacific Northwest for the purchase of policies before Retirement Value had raised and
received sufficient funds from investors to pay the purchase price of the policy and to maintain
the promised premium reserve. In a number of instances, Retirement Value directed KPKF to
deliver funds to Pacific Northwest even before Retirement Value had raised and received
sufficient funds from investors to pay for the purchase price. These instructions created a risk
that Retirement Value would purchase policies but be unable to establish the promised reserves
to pay premiums creating a risk of default by Retirement Value on the investments tied to that
policy. In most cases, these funds were released to Pacific Northwest without requiring delivery
of the policies which the funds were intended to purchase.
26. In addition, my review of the records indicates Retirement Value routinely
allowed Pacific Northwest to disburse funds to James Settlement Services as funds became
available and without requiring delivery of the policies. Allowing the escrow agent to disburse
funds without requiring the delivery of policy being purchased defeats the purpose of the escrow
and leads to a risk that policies would be paid for and not delivered. As of the date I was
appointed (May 5, 2010), Retirement Value was party to contracts to purchase 12 policies of
insurance from James Settlement Services. At Retirement Value's instructions, KPKF had
delivered $7.1 million towards the purchase of these policies; of which $6.5 million had been
released to James Settlement Services without delivery of the policies.
27. In order to discover the extent of the commingling, I directed that my agents
examine the payment instructions provided by Retirement Value to KPKF and the corresponding
10
62
payment instructions from KPKF to Pacific Northwest. An example of these instructions is
attached as Exhibit D to my affidavit. My agents reviewed the payment instructions relating to
the reserve accounts for policies PLI140-1111 09-DM, LFG740-071509-RL and AXA091-
012110-PC. They have srnnmarized the disbursements made to purchase policies from those
accounts in a Summary of Reserve Disbursements, which is attached as Exhibit E to my
affidavit. This analysis reveals that it is not possible to trace the investment by any particular
investor to the purchase of any particular policy.
28. According to Retirement Value's records, it paid $4,290,000 to purchase policy
PLI140-111109-DM. KPKF disbursed $3,290,000 from various reserve accounts to Pacific
Northwest to purchase the policy. Summary of Reserve Disbursements at 1. Retirement Value
separately sent $1,000,000 from its operating account to Pacific Northwest on account of policy
PLI140. The purchase price for PLI140, according to the purchase agreement between
Retirement Value and James Settlement, was only $2,360,000. Records provided by Pacific
Northwest, confirm that $2,360,000 was applied to the PLI140 policy- leaving $1,930,000
"paid" on behalf of PLI140 but actually used to purchase other policies. From the records
available to me, I cannot detennine which of the fi.mds sent to Pacific Northwest to purchase the
PLI140 policy were actually used for that purpose.
29. Ofthe funds sent to Pacific Northwest to purchase the PLI140 policy, only 18.2%
came from the appropriate account. The remaining 81.8% came from Retirement Value's
operating account and from thirteen different reserve accounts. !d. Instead of using the funds in
the PLI140 reserve account to buy that policy, Retirement Value used them to purchase other
policies. KPKF's records reflect that it disbursed $2,205,507 from the PLI140 reserve account
11
63
for the purchase of policies. Of these funds, $779,967 went towards the purchase of policy
PLI140 and $1,425,540 went towards the purchase of other policies. !d. at 2
30. According to the purchase agreement between Retirement Value and James
Settlement Services, the purchase price for LFG740-071509-RL was $1,040,000. However, both
the records provided by Pacific Northwest and by KPKF show that $1,250,000 was paid for the
policy. The records available to me do not explain the $210,000 discrepancy between the
purchase price (as set by the purchase agreement) and the amount actually paid for policy
LFG740. Of the $1,250,000 paid for the policy, only $10,000 (0.8%) came from the reserve
account dedicated to policy LFG740. The remaining $1,240,000 (99.2%) came from fifteen
other reserve accounts. !d. at 5. Kiesling Porter disbursed $387,000 from the LFG740 reserve
account to Pacific Northwest for the purchase of policies. Of that, only $10,000 went towards
the purchase ofLFG740. The remainder was used to purchase three other policies. Id. at 6.
31. According to the purchase agreement between Retirement Value and James
Settlement Services, the purchase price for policy AXA091-012110-PC was $1,300,000. Of the
$1,300,000 paid for the policy, only $222,101 (17.1%) came from the reserve account dedicated
to policy AXA091. The remaining $1,077,899 (82.9%) carne from eight other reserve accounts.
!d. at 3. KPKF disbursed $1,359,904 from the AXA091 reserve account for the purchase of
policies. Of that, $222,101 went to purchase policy AXA091 and the remaining $1,137,803 was
used to purchase twelve other policies. !d. at 4.
32. Based on the results of the review of the three accounts (PLI140-111109-DM,
LFG740-071509-RL and AXA091-012110-PC), the documentary evidence of pervasive
commingling throughout the life ofRetirernent Value and Dick Gray's testimony that Retirement
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Value commingled funds from the beginning of its operations, I determined that further analysis
of the reserve accounts would not yield different or better information.
33. The mishandling of the reserve accounts described above caused Retirement
Value to have less in reserve than it promised as part of the RSLIP. According to the RSLIP
documents, Retirement Value agreed to maintain sufficient reserves to pay premiums on the
policies it acquired for the life expectancy of the insured (as calculated by Midwest Medical
Review) plus 24 months. As of May 5, 2010, the reserve accounts for the fully subscribed
policies on a net basis were short by $272,159.87. Some of the reserve accounts on the fully
subscribed policies had more than the required amount while others had less than the required
amount. When the reserve accounts for the policies that were not fully subscribed are included,
the total reserves are short by $14.2 million from the LE+24 level promised by Retirement
Value. Taking into account reserves allocated for policies not acquired and for $2.6 million of
investor money that was never placed into reserve accounts, the total reserve shortfall (from the
LE + 24 level) is approximately $3 million. I have attached my calculations of the reserve
shortfalls as F to my affidavit.
34. Retirement Value's use of unreasonably short life expectancy calculations caused
additional shortfalls in the necessary premium reserves. In the course of its investigation, the
State obtained life expectancy calculations by 21st Services and AVS Underwriting, LLC on
many of the persons insured under policies owned by Retirement Value. Comparison of their
calculations to those by Midwest Medical show that the life expectancies calculated by 21st and
AVS, on the same individuals generated at or about the same time, were about 2Y2 times as long.
Due to the questions raised by the State and to obtain the best possible information, the Receiver
obtained his own life expectancy calculations from Insurance Strategies Services, LLC ("ISC"),
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another major provider of life expectancy calculations. These calculations were based on the
most current medical information available from the insureds and their doctors. The ISC life
expectancy calculations are comparable to those of AVS and 21st and more than twice as long as
the median calculations provided by Midwest MedicaL The chart below summarizes the results
from Midwest Medical, 21st Services, A VS and ISC.
Midwest Medical 21>t AVS ISC
(50%) (85%) (50%) (50%) (50%)
Portfolio Only Data 49 48 38 49 48
AverageLE
(in months) 52.43 83.69 121.03 134.67 123.98
%Mlvf (50%) 160% 231% 257% 236%
Because the JSC life expectancy results are comparable to those of A VS and 21st and because of
the good reputation enjoyed by ISC, my actuarial consultants and I are comfortable that ISC's
calculations fairly estimate the life expectancies of the insureds.
35. Retirement Value reserved too little money to pay premiums because it relied on
life expectancy calculations that were too short. Because the insureds' life expectancies are
more than twice as long as originally represented, I will need to pay premiums for a longer
period of time that anticipated. In addition, the premiums that I will have to pay are higher than
originally anticipated because the premiums necessary to keep a policy in force increase as the
insured ages. As a result, Retirement Value did not reserve sufficient funds to pay premiums.
36. To better understand the magnitude of the reserve shortfall, I had my actuaries,
L&E, determine how much money would be needed to maintain each policy in force until the
life expectancy of the insured. Using infonnation provided by the insurance companies, L&E
was able to estimate the cost of maintaining the insurance in force for the insureds' life
expectancy. It estimates the cost of maintaining the 4 8 remaining policies in force during the
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insured's life expectancy will be approximately $58 million from February 28, 2011 onward.
The reserves set aside for those policies originally were only $15.3 million. 1
37. In addition to computing the total reserve required to maintain each policy
through the insureds' life expectancy, L&E also calculated how long each premium reserve
account would be expected to last using the anticipated premium cost for the applicable policy.
Not a single policy has sufficient reserves to maintain the policy in force for the insured's life
expectancy. In other words, each policy has less than a 50/50 chance of maturing before its
premium reserves are exhausted.
38. I have also reviewed the insurance policies owned by Retirement Value, records
provided by the insurance companies as well as the change of beneficiary forms executed in
connection with those policies. No investor is or was named a beneficiary, much less an
irrevocable co-beneficiary, on any of the policies owned by Retirement Value. The sole
beneficiary was KPKF. I have seen no indication on any of the documents that I have reviewed
that KPKF was named an irrevocable beneficiary on any policy owned by Retirement Value. In
every instance in which the insurance company identified the nature of KPKF's beneficiary
designation, the insurance company noted that KPKF was a revocable beneficiary.
39. Attached as Exhibits G, H, I, J and K are true and correct copies of documents
that are kept by Retirement Value in the regular course of its business, and such records are made
at the time of the acts, transactions, occurrences and/or events reflected in the records, or within
a reasonable time thereafter, by someone with personal knowledge of such acts, transactions,
occurrences and or events.
1
These are the reserves allocated to specific policies. This figure does not include funds by the
Receiver that are not dedicated to any particular policy or funds received in connection with the
maturity of policy PLI140-llll 09-DM.
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FURTHER AFFIANT SAYETH NOT.
SUBSCRIBED AND SWORN: TO BEFORE ME thi~ dayof July 2011.
Notary Public.
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TAB 2
INITIAL REPORT
OF
EDUARDO S. ESPINOSA,
TEMPORARY RECEIVER
FOR
RETIREMENT VALUE, LLC
A TEXAS LIMITED LIABILITY COMPANY
As of
July 28, 2010
Issued in connection with
that certain matter pending before the
126th District Court of Travis County, Texas,
Cause Number D-1-GV-10-000454
70
I. Background and Status of the State's Suit .......................................................................... 1
II. The Appointment of the Receiver ....................................................................................... 2
III. The Receiver's Investigation ............................................................................................... 3
A. Nature of the Investment ......................................................................................... 4
B. Use oflnvestor Funds by Retirement Value ........................................................... 5
C. Fraud in the Sale of Investments ............................................................................. 7
1. The Investors Are Not Irrevocable Co-Beneficiaries .................................. 8
2. Investor Funds Were Not Held in Escrow .................................................. 8
3. Retirement Value Overstated the Likely Return from the Investments
and Understated the Likely Risks .............................................................. 11
4. Retirement Value failed to disclose the risk of regulatory action ............. 19
5. Other Issues ............................................................................................... 19
IV. Actions to Preserve and Protect the Estate ........................................................................ 20
A. Cash and cash equivalents ..................................................................................... 21
B. Policies .................................................................................................................. 22
C. Professional Advisors ............................................................................................ 23
1. Asset Servicing Group .............................................................................. 23
2. Lewis & Ellis ............................................................................................. 24
3. BKD LLP .................................................................................................. 25
D. Issues Confronting the Portfolio's Administration ............................................... 25
1. Portfolio Value .......................................................................................... 25
2. Insufficient Premium Reserves ................................................................. 26
3. The portfolio structure ............................................................................... 27
V. Conclusions ....................................................................................................................... 28
71
INITIAL REPORT OF EDUARDO S. ESPINOSA,
TEMPORARY RECEIVER FOR RETIREMENT VALUE, LLC
On May 5, 2010, the 126th Judicial District Court of Travis County, Texas (the "Court")
appointed Eduardo S. Espinosa as the temporary receiver for Retirement Value, LLC, a Texas
limited liability company. Since then, my team and I have been engaged in: (a) gathering and
preserving Retirement Value's assets; (b) investigating claims against Retirement Value by
investors and others; and (c) investigating Retirement Value's potential claims against its
principals and other participants in its Re-Sale Life Insurance Policy Program. We have also
spoken or corresponded with many of the investors. However, because there are more than 900
investors, it is not possible for us to communicate with each investor, individually. This report
updates the investors, the Court and the public as to the status ofthe Receivership.
I. Background and Status ofthe State's Suit
On May 5, 2010, the State of Texas filed suit against Retirement Value, Gray and Collins
alleging that they were selling unregistered securities, engaging in securities fraud and violating
the Texas Deceptive Trade Practices Act. Among other things, the State sought the appointment
of a receiver for Retirement Value, the issuance of temporary and permanent injunctions against
the defendants and restitution for the losses suffered by investors. The State subsequently
amended its suit to include Wendy Rogers as a defendant, and to seek a receivership over Hill
Country Funding, LLC, a Texas limited liability company ("HCF-TX"), and Hill Country
Funding, LLC, a Nevada limited liability company ("HCF-NV"), each a Retirement Value
affiliate.
On May 28, 2010, the Court entered, by agreement ofthe parties, a temporary injunction
against Gray and Retirement Value and continued the Receiver's appointment. The temporary
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injunction and the receivership will remain in place until the end of the trial of this matter, which
is currently scheduled for February 28, 2011.
Bruce Collins has agreed to the entry of a permanent injunction which the Court entered
on June 17, 2010. He has also entered into a settlement with the Receiver under which Collins
transferred approximately $319,000 in cash and other assets to the Receiver. On June 17, 2010,
the Court approved the settlement between Collins and the Receiver.
II. The Appointment of the Receiver
Whenever there are allegations of fraud in an investment context, particularly if there are
assets remaining in the estate, the State will usually seek the appointment of a receiver to
preserve the assets and protect them from being dissipated by the individuals accused of fraud.
'
The Receiver's duties include: (a) collecting and preserving the receivership assets; (b) notifying
the investor-victims ofthese proceedings; (c) attempting to effect fair restitution to the investor-
victims based on a plan to be approved by the court; and (d) assisting the State in its
investigation of the Defendants and those who dealt with them.
The Receiver has retained the law firm of K&L Gates, LLP to represent him in
connection with this case, to assist him in the performance of his duties and to prosecute or
defend litigation on behalf of Retirement Value. The Receiver is a partner in K&L Gates. He
has also retained the following professionals:
• BKD, LLC to act as the Receiver's accountants and to prepare the Receivership's
books and records;
• Asset Servicing Group to act as a portfolio manager for Retirement Value's
policies and to advise the Receiver on how to maximize the policies' value; and
• Lewis & Ellis to provide actuarial consulting as to the portfolio's value and the
funds necessary to keep the policies in force.
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The fees of the Receiver, K&L Gates and the other professionals employed by the Receiver are
subject to the approval ofthe Court.
III. The Receiver's Investigation
Once appointed, the Receiver instituted an investigation into the business and assets of
Retirement Value and its affiliates. The investigation is intended to: (l) determine Retirement
Value's current status and to assess the investors' claims against it; (2) identifY, gather and
protect any assets belonging to Retirement Value; and (3) to uncover and prosecute viable claims
against members, officers, licensees and others who have done business with Retirement Value.
The investigation, although well under way, is not complete. To date, we have
interviewed most of Retirement Value's employees, including Dick Gray, Wendy Rogers and
Bruce Collins as well as key employees of Kiesling Porter. We have also spoken with many
investors and licensees to gain their perspectives on the investment offered by Retirement Value.
In addition, we have spoken with representatives of each bank known to have done business with
Retirement Value as well as representatives of the insurance companies which have issued
policies owned by Retirement Value. We have also spoken with Ron James of James Settlement
Services, which sold the policies to Retirement Value.
We have searched Retirement Value's offices for the purpose of gathering and examining
records relating to the operations of Retirement Value. We have also obtained and reviewed the
accounting records maintained by Retirement Value and Kiesling Porter as well as banking and
other financial records. In addition, we have gathered some 236 gigabytes of data (if printed,
that would be roughly about 14 million- pages of information) from Retirement Value's
computers. In addition, we have obtained access to substantial additional Retirement Value data
stored by various vendors. With the assistance of the Texas Department of Insurance, we have
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also gathered additional documents and records from the insurance companies. We have also
reviewed recordings ofRetirement Value's monthly sales meetings and calls with licensees.
As a result of the investigation, we have been able to reach certain preliminary
conclusions as to the business conduct ofRetirement Value.
A. Nature of the Investment
From April 2009 through March 29, 2010, Retirement Value raised approximately $77
million from more than 900 investors through the sale of investments in its Re-Sale Life
Insurance Policy Program.
Each of the investments was structured as a loan to Retirement Value, whereby the
investors provided Retirement Value with funds in exchange for Retirement Value's promise to
pay a fixed sum of money at an undetermined date in the future. The amount that Retirement
Value agreed to pay was tied to the calculated life expectancy of insureds under life insurance
policies purportedly owned by Retirement Value. In all instances, Retirement Value agreed to
pay a return of 16.5% simple interest per year for the insured's calculated life expectancy. Thus,
Retirement Value would pay $18,800 on a $10,000 investment in a policy where the insured had
a calculated life expectancy of 64 months. The date on which the insured under the policy died
set the date that the investment matured and when Retirement Value would be required to repay
the loan. The loan's maturity date did not affect the amount of money that Retirement Value was
obligated to pay the investor, except that investors were entitled to a return of unused premiums,
if any. Each investor was allowed to select a life insurance policy or policies to which to tie his
or her investment from a rotating portfolio of ten policies maintained by Retirement Value.
Investor Agreement- Qualified (Exh. A-1); Investor Agreement- Non-Qualified (Exh. A-2). 1
1
The exhibits to this report are contained in the Appendix to the Initial Report.
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B. Use oflnvestor Funds by Retirement Value
Retirement Value used funds received from investors to purchase insurance policies, to
set up premium reserves, to pay administrative costs, including commissions to its licensees, fees
payable to Kiesling Porter and to fund its operations. The amount of the premium reserve for a
given policy was calculated by Retirement Value based on: (i) the life expectancy of the insured,
as calculated by Midwest Medical, plus 24 months; and (ii) a schedule of estimated premiums
provided by the seller of the policies, James Settlement Services, LLC. 2 Retirement Value paid
Kiesling Porter a fee equal to 1% of the face value of each policy and the licensees a commission
of no less than 16% of the money invested. Any money not allocated towards purchasing the
policies, establishing premium reserves or paying administrative costs was immediately released
by Kiesling Porter to Retirement Value.
All money paid by investors was received by and held in accounts administered by
Kiesling Porter. On any given investment, after funds cleared and the 10-day free look period
expired, 3 Retirement Value would instruct Kiesling Porter as to the distribution of the funds.
Based on instructions received from Retirement Value, Kiesling distributed money to the
licensees involved in the particular investment, to Retirement Value's operating account and to
itself as payment for its fee. The remaining funds were placed in sub-accounts dedicated to the
particular policies in which the investor invested.
As of May 5, 2010- the date that the TRO was entered, Retirement Value had distributed
the following amounts:
2
This schedule was an estimate. It did not reflect the premiums actually due on the policies or
ultimately paid by Retirement Value.
3
The 10 day free look commenced running upon Kiesling Porter's receipt of executed
documents or funds from the investor, whichever came first. Accordingly, the 10 day free look
period often ran contemporaneously with the funds clearing process.
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~!ir~~~~i*~~~~fifilf~
James Settlement Services, LLC $27,939,063.00
(via Pacific Northwest Title)
Retirement Value, LLC Operating $10,251,508.49
Kiesling, Porter, Kiesling & Free PC $1,275,666.48
Licensees $12,796,389.76
KPKF Accounting Record Excerpts- Vendor Distributions (Exh. B). Retirement Value used the
remaining funds to pay premiums and to fund the premium reserve accounts. There are
approximately $23 million remaining in the various reserve accounts.
The Defendants or members of their immediate families received the following amounts
from Retirement Value prior to the issuance of the TRO:
Dividends (10/6/09 to 3/5/10) $2,139,000 Dividends (10/6/09 to 3/5/10) $688,000
20 I 0 Tax Prepayment 599,200 2010 Tax Prepayment 149,800
Dick Gray salary (2009-10) 210,574 Wendy Rogers salary (2009-10) 133,693
C Gray (2009-10) 45,833 Wendy Rogers, Licensee 12,300
Dick Gray, Licensee 13,400
Honorariwn as COO $75,000 Buyout Agreement (2010) $231,155
B Collins, Licensee 43,390 Dividends ( 2009) 579,307
Collins Marketing, Licensee 469,799
Total Total
RV & KPKF Accounting Record Excerpts- Insiders (Exh.C).
Retirement Value also diverted over $1 million to HCF-TX, a company owned and
controlled by Dick and Catherine Gray. In a series of transactions occurring in February and
March of2010, Retirement Value and-HCF-TX transferred significant sums of money between
4
David Gray is the brother of Dick Gray and a former member (owner) of Retirement Value.
Elizabeth Gray is David Gray's wife.
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them. The net result ofthese transactions was the transfer of$1,150,000 from Retirement Value
to HCF-TX. RV Accounting Record Excerpts- RV to HCF (Exh. D). Dick Gray explained
these transfers as money that he intended to use to reimburse previous investors whom he had
convinced to invest in a Ponzi scheme operated by Secure Investment Services, Inc.
On March 30, 2010- the day that the Texas State Securities Board served its emergency
cease and desist order on Retirement Value, Dick Gray obtained a cashier's check drawn on the
HCF-TX account at First Commercial Bank in the amount of $1,075,000 5 and withdrew all of
the funds remaining in Retirement
This text is long and has been trimmed here. Open the source document for the complete record.