# James Poe and Senior Retirement Planners, LLC v. Eduardo S. Espinosa in His Capacity as Receiver of Retirement Value, LLC > Texas Court of Appeals, 3rd District (Austin) · July 14, 2015 URL: https://www.frixlaw.com/law-library/cases/4069954 ## Case - **Court:** Texas Court of Appeals, 3rd District (Austin) - **Decided:** July 14, 2015 - **Precedential status:** Published - **Opinion:** Opinion - **Cited by:** 0 later opinions in the Frix Law Library ## Citator (automated) - No negative treatment found by the automated citator. That is not the same as a confirmation that the case is good law; read the citing cases. - Full citator and citing cases: https://www.frixlaw.com/law-library/cases/4069954 ## Opinion text 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 t [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/4069954. Public record. Not legal advice.