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Federal appeals court ruling on American Cancer Society's effort to retain $240,000 in sponsorships from Giant Operating

Federal appeals court ruling on American Cancer Society's effort to retain $240,000 in sponsorships from Giant Operating

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Published by reesedunklin

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Categories:Types, Business/Law
Published by: reesedunklin on Mar 28, 2012
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03/28/2012

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IN THE UNITED STATES COURT OF APPEALSFOR THE FIFTH CIRCUIT
No. 10-10989THE AMERICAN CANCER SOCIETY,Interested Party - Appellantv.Receiver, KAREN L. COOK,Receiver - Appellee Appeal from the United States District Courtfor the Northern District of TexasBefore JONES, Chief Judge, and HIGGINBOTHAM and SOUTHWICK, CircuitJudges.EDITH H. JONES, Chief Judge:Karen Cook (“Cook”) was appointed receiver over the assets of a numberof related corporations and individuals, who the Securities and ExchangeCommission (“SEC”) alleged violated multiple federal securities laws. Cookdiscovered that before the SEC filed its civil complaint, the corporate entitiesinvolved had made charitable contributions to the American Cancer Society(“ACS”) totalling $240,000. Cook moved to recover the donations on behalf of thereceivership, arguing that they qualified as fraudulent transfers under Texas’sUniform Fraudulent Transfer Act (“TUFTA”). T
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§ 24.005(a). The district court granted the motion and entered judgment
United States Court of AppealsFifth Circuit
F I L E D
March 20, 2012Lyle W. CayceClerk
Case: 10-10989 Document: 00511794306 Page: 1 Date Filed: 03/20/2012
 
No. 10-10989against ACS for the full $240,000. ACS has appealed. We REVERSE. TheReceiver’s attempt to liken the scheme in question to a “Ponzi-like fraud,” andtherefore reduce her burden to proving “presumed intent to defraud,” fails forlack of evidence. Not all securities frauds are Ponzi schemes.
I.
On September 28, 2009, the SEC commenced the underlying action foralleged violations of federal securities laws against Giant Operating, LLC, GeorgeWesley Harris (“Harris”), Stephen Christopher Plunkett (“Plunkett”), GiantPetroleum, Inc., and DSSC Operating, LLC. The corporate entities willsometimes be collectively referred to as “Giant.” In its complaint, the SECalleged that between December 2007 and September 2009, Giant Operating, byand through Harris, raised approximately $13.4 million from investors throughfive unregistered securities offerings. The offered securities were interests in oil-and-gas drilling programs, which promised considerable returns within twelvemonths. Investment brochures claimed that 80% of the offering proceedingswould be spent on operational costs—such as drilling, testing, andcompletion—while the remaining 20% would be spent on management costs. Inreality, according to the SEC, a considerable portion of investor funds wastransferred from Giant Operating to a DSSC account, which Harris devoted topersonal expenses unrelated to oil-and-gas programs. Harris also transferredmillions of dollars to defendants Plunkett and Giant Petroleum, another companyHarris owned and controlled. Based on these allegations, the SEC chargedmultiple violations of federal securities laws. After suit was filed, the district court appointed Cook as receiver over thedefendants’ assets (except those of Plunkett). The court authorized Cook to“immediately take and have complete and exclusive control, possession, andcustody of the Receivership Estate and to any assets traceable to assets ownedby the Receivership Estate.” Cook was also authorized to “[i]nstitute such actions2
Case: 10-10989 Document: 00511794306 Page: 2 Date Filed: 03/20/2012
 
No. 10-10989or proceedings to impose a constructive trust, obtain possession, and/or recover judgment with respect to persons or entities who received assets or recordstraceable to the Receivership Estate.”Shortly after her appointment, Cook discovered that the corporatedefendants had made a number of transfers to ACS from 2007 to 2009 as asponsor of ACS’s Cattle Baron’s Ball. Giant contributed at least $240,000 to thismajor fundraising event over the three-year period. Cook filed a series of motions seeking the turnover of these contributions. To support the receivership’sclaim to these funds, Cook asserted a number of theories. Cook principallyargued that the donations were recoverable as fraudulent transfers underTUFTA.
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24.005(a). She also proffered an equitabletheory of constructive trust, arguing that actual fraud justified disgorgement of the contributions. The parties agreed that Cook’s turnover motion would bedetermined by submission of evidence to the court without the necessity of a trial. Adopting the findings and conclusion of the magistrate judge, the districtcourt concluded that the funds were recoverable as fraudulent transfers. Thecourt reasoned that because defendants were operating a “Ponzi-like scheme,”their transfers to ACS were presumptively made with fraudulent intent.
Warfield v. Byron
, 436 F.3d 551, 558-59 (5th Cir. 2006). The court rejecteddefenses raised by ACS pursuant to TUFTA, granted Cook’s motion, and entered judgment against ACS for the full $240,000. ACS timely filed its interlocutoryappeal.
II.
To recover the transfers from Giant to ACS, the receivership was requiredto demonstrate that ACS received transfers from Giant that were made withactual intent to hinder, defraud or delay creditors.
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§ 24.005(a). The district court found that Cook satisfied her burden of provingintent to defraud with an affidavit that described Giant’s operations and3
Case: 10-10989 Document: 00511794306 Page: 3 Date Filed: 03/20/2012

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