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SCHOLES v. AFRICAN ENTERPRISE

November 16, 1993

STEVEN S. SCHOLES, not individually, but solely as Receiver for Michael S. Douglas, D & S Trading Group, Ltd., Analytic Trading Systems, Inc., Analytic Trading Service, Inc., and Market Systems, Inc., Plaintiff,
v.
African Enterprise, Inc., Bethany Evangelical Free Church, Calvary Chapel of Chula Vista, Camp Elim and other Youth Ministries of Haiti, Food for the Hungry, Inc., Gospel Revival Ministries, Heart Cry International, Hindustan Bible Institute, Inc., International Students, Inc., Lake Forest Academy, Lakeland Evangelical Free Church, Operation Brotherhood West Center, Proclamation International, Trinity College, Trinity Evangelical Divinity School, World Vision Inc., and Camp Forest Springs, Defendants.


ALESIA


The opinion of the court was delivered by: JAMES H. ALESIA

At issue in this case is whether an equity receiver for certain defunct entities has asserted cognizable claims on behalf of the entities to recover funds allegedly fraudulently transferred by a principal of the entities to the defendants. In his First Amended Complaint, plaintiff Steven S. Scholes, as Receiver ("the Receiver") for Michael S. Douglas D & S Trading Group, Ltd. ("D & S"), Analytic Trading Systems, Inc. ("AT Systems"), Analytic Trading Service, Inc. ("AT Service"), and Market Systems, Inc. ("MSI"), collectively referred to as the receivership entities, asserts 51 Counts. He asserts a fraudulent conveyance count, an unjust enrichment count and a constructive trust count against each of the 17 Charity defendants. Presently before the court are the parties' Objections, and corresponding Responses, to the recommendation of Magistrate Judge Pallmeyer to grant in part and deny in part the Motion to Dismiss brought by defendants African Enterprise, Inc., Bethany Evangelical Free Church, Food for the Hungry, Inc., Hindustan Bible Institute, International Students, Inc., Proclamation International, Inc., Trinity College, Trinity Evangelical Divinity School, World Vision, Inc., lake Forest Academy, Heart Cry International, and Camp Elim and Other Youth Ministries of Haiti. *fn1" Collectively, these defendants are referred to as the Charities or generally as the defendants.

 I. FACTS2

 On November 13, 1989, the Securities and Exchange Commission ("SEC") filed an action in this District Court against Douglas and three of the receivership entities (D & S, AT Systems and AT Service), alleging numerous violations of federal securities laws. Complaint, P 2. On November 30, 1989, this court appointed Steven S. Scholes as equitable receiver for defendants in the SEC action and directed Scholes to take possession of and liquidate all their choses in action and to recover their assets. Id. The Receiver purports to bring this action pursuant to his obligations under the November, 1989 order and a subsequent order in which the court placed MSI in receivership and appointed Scholes as its receiver, as well. Id. P 3. The Receiver asserts that jurisdiction over this action is ancillary to the court's jurisdiction over the SEC action. Id. P 4.

 Beginning in 1987, Douglas created an investment partnership, D & S, of which he was a general partner. Id. P 6. Douglas and others diverted and misappropriated funds belonging to D & S for their own use. Id. P 7. In 1988, Douglas and others created another investment partnership (which was never named), of which AT Systems was the general partner. AT Systems had been created as a mechanism into which D & S funds could be funnelled without notice to state securities regulators and then looted. Id. P 9. In 1989, Douglas and others created AT Service, which was intended to be the managing general partner of a partnership into which both D & S and AT Systems funds could be funnelled, again without drawing the attention of regulators. Douglas managed the affairs of AT Service through MSI, a wholly owned corporation funded with assets belonging to the defendants in the SEC action. Id. P 10. Douglas and others formed both AT Service and MSI "in order to loot them." Id.

 The Complaint asserts fifty-one counts, three counts against each of the seventeen defendant Charities. The Receiver alleges that each of the Charities received assets diverted from one or more of the receivership entities. With respect to all but three of the Charities, it is alleged that the diverted assets were in the form of checks drawn on Douglas' personal bank accounts. (The source of the allegedly diverted assets now in the hands of the remaining defendant Charities is not stated.) The Receiver alleges that the Charities' receipt of the allegedly diverted assets constitutes a fraudulent conveyance (Counts I, IV, VII, X, XIII, etc.); violates fundamental principles of justice, equity and good conscience, and therefore constitutes unjust enrichment (Counts II, V, VIII, XI, etc.); and requires imposition by this court of a constructive trust on the improperly obtained assets (Counts III, VI, IX, XII, etc.).

 II. BACKGROUND

 In their Motion to Dismiss, defendants argue that this suit should be dismissed because (1) the Receiver lacks standing to assert the fraudulent conveyance claims, (2) the court lacks personal jurisdiction over six of the Charities, (3) the Complaint fails to state a claim for fraudulent conveyance under the Illinois statute, (4) the Complaint fails to state a claim for imposition of a constructive trust and (5) the Complaint fails to state a claim for unjust enrichment. The issues of personal jurisdiction were subsequently separated from the other arguments and will be addressed separately. In her January 5, 1993 Report and Recommendation ("R&R") on the motion, Magistrate Judge Pallmeyer recommended granting defendants' motion as to the unjust enrichment claims and constructive trust claims, and recommended denying the motion as to the fraudulent conveyance claims. Scholes v. African Enterprise, Inc., 1993 U.S. Dist. LEXIS 23, No. 90 C 3989 (N.D. Ill. January 5, 1993) (Report and Recommendation of Magistrate Judge Pallmeyer). Both sides submitted Objections to the R&R and Responses to the others' Objections. Pursuant to 28 U.S.C. ┬ž 636(b), this count will review de novo those portions of the R&R to which objections are made.

 III. DISCUSSION

 A. Fraudulent Conveyance Claims

 1. Standing

 In their motion, defendants argued first that the Receiver lacks standing to raise the fraudulent conveyance claims. Defendants argued that the Receiver lacks standing because (1) the Illinois fraudulent conveyance statute in effect at the time allows only creditors to raise such a claim and the Receiver is not a creditor, (2) the order appointing Scholes receiver does not allow him to raise such a claim, and (3) by law, a Receiver cannot assert such claims which belong to third parties and not to the receivership entities. The Magistrate Judge concluded that the Receiver has standing and creditor status to raise fraudulent conveyance claims under the Illinois law. R&R, at p. 23. The defendants object to this conclusion by arguing that the Magistrate Judge improperly relied on bankruptcy decisions and that she failed to give proper credence to prior orders of this court. This court will address first the issue of whether the Receiver can raise claims of third parties.

 In the R&R, the Magistrate Judge extensively and thoroughly analyzes analogous case law and determines that the Receiver has standing to raise fraudulent conveyance claims that benefit the general creditors of the receivership entities. R&R, at pp. 9, 15, 23. In their objections to this conclusion, the defendants argue that the case law is clear that equity receivers have no standing to raise claims of third parties. Defs.' Objections, at pp. 6-12. In response, the Receiver argues that the case law does not preclude a receiver from asserting fraudulent conveyance claims. Pl.'s Resp. to Defs.' Objections ("Pl.'s Resp."), at pp. 2-11. All the parties and the R&R initially focus on the Supreme Court's holding in Caplin v. Marine Midland Grace Trust Co., 406 U.S. 416, 92 S. Ct. 1678, 32 L. Ed. 2d 195 (1972). Caplin is, thus, a good starting point.

 Defendants argue that Caplin denies a trustee, appointed under the old Bankruptcy Act, standing to assert claims of third parties. Defendants further argue that an equity receiver, like Scholes, possesses authority comparable to and no greater than a trustee under the old Bankruptcy Act. Defs.' Objections, at p. 6. The Receiver counters that the defendants misread Caplin because in Caplin the trustee plaintiff conceded he was raising the claims of third-party debenture holders and not claims belonging to the entities in receivership. Pl.'s Resp., at p. 4. The Magistrate Judge essentially agreed with the Receiver and held that pre-Caplin cases which apply to the facts of this case allow the Receiver to raise such claims and that Caplin did ...


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