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 is entitled to summary judgment on his claims brought on behalf of the entities to recover funds allegedly fraudulently transferred by a principal of the entities to the defendants, Plaintiff Steven S. Scholes brought this Motion for Summary Judgment on Counts I, II, and III of his First Amended Complaint against two remaining defendants, Rudolph Friesen and Joseph C. Phillips. Both have opposed the plaintiff's motion; defendant Friesen has filed a cross-motion for summary judgment. 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 plaintiff's motion.
Defendant Friesen's Cross-Motion for Summary Judgment was not passed upon in the Report. In his cross-motion, defendant raises one argument in opposition to all three claims of the Receiver -- that he sustained a net loss as a result of his investments in the receivership entities. For support, he refers the court to "(1) Affidavit of Rudolph Friesen, (2) Rudolph Friesen's Brief in Opposition to Plaintiff's Motion for Summary Judgment, and (3) Rudolph Friesen's Statement of Additional Facts Requiring Denial of Plaintiff's Motion for Summary Judgment". Defendant's Cross-Motion, at 2. Defendant's argument will be reviewed de novo.
The facts in this case are complex and well known to this Court. See SEC v. Douglas, No. 89 C 8407 (N.D. Ill. Nov. 30, 1989) (order appointing a receiver in the lead case brought by the SEC for permanent injunction against Douglas and the entities); Scholes v. Stone, McGuire & Benjamin, 143 F.R.D. 181 (N.D. Ill. 1992) (class plaintiffs' motion for certification in related case); Scholes v. African Enterprise, Inc., 1993 WL 478104 (N.D. Ill.) (defendants' motion to dismiss in related case). The facts are not materially disputed. Therefore, for the purposes of this motion, we will discuss only those facts which are relevant to this decision.
From August 1987 through November 1989, Michael Douglas operated a bogus investment scheme in which he and others induced investors to purchase limited partnership interests in four entities: D&S Trading Group, Ltd. ("D&S"), Analytic Trading Systems, Inc. ("AT Systems"), Analytic Trading Service, Inc. ("AT Service") and Market Systems, Inc. ("MSI") hereinafter referred to as the receivership entities). While these entities appeared to the public to be legitimate business operations, they were solely vehicles through which Douglas operated a classic "Ponzi" scheme. After luring investors into investing their money into these entities, Douglas used this money both to fund his lavish lifestyle and to pay earlier investors what were falsely represented as profits on their investments. Finally, on November 13, 1989, the Securities and Exchange Commission shut down all of Douglas' operations and charged Douglas and the entities with numerous securities law violations. Douglas is now serving a twelve-year prison term for fraud charges arising out of the scheme.
In his Local Rule 12(n) Statement submitted in conjunction with the present motion, defendant Friesen asserts that on May 2, 1988, he made his initial investment of $ 60,000 with D&S, upon the recommendation of Joseph Trotti, an insurance agent and financial advisor. (Friesen Affidavit P 2; Friesen's Rule 12(n) Statement P 2.) Friesen understood that he would be a limited partner in D&S and that Michael Douglas would be the general partner. (Friesen Aff. P 4; Friesen's Rule 12(n) Statement P 4.) Friesen never met Douglas, however; throughout the entire transaction, Friesen dealt only with Trotti. (Friesen Aff. P 4; Friesen's Rule 12(n) Statement P 4.) Six months after he made his investment, Friesen withdrew his funds from D&S, recovering both his initial $ 60,000 investment and an additional payment of $ 17,115.06, which Friesen reported on his income tax returns and on which he paid the income tax due. (Friesen Aff. P 5; Friesen's Rule 12(n) Statement P 5.
Nine months later, Friesen communicated to Trotti his desire to invest another $ 25,000 in D&S. (Friesen Aff. P 6; Friesen's Rule 12(n) Statement P 6.) Trotti informed Friesen that D&S had changed its name to Analytic Trading Systems and that a minimum investment of $ 100,000 was required to participate. Id. Trotti was willing to combine Friesen's $ 25,000 investment with other investors monies to make up the minimum amount necessary. Id. Friesen agreed to this arrangement and delivered a check made payable to Joseph Trotti in the amount of $ 25,000. (Friesen Aff. P 7; Friesen's Rule 12(n) Statement P 7.) Trotti endorsed the check and made it over to AT Systems by writing "Pay to the order of AT Systems" on the reverse. (Exhibit to Friesen Aff., Friesen Aff. P 8; Friesen's Rule 12(n) Statement P 8.) The check was deposited in AT Systems' account in the Harris Bank. Id. Friesen claims he never recovered the $ 25,000 that he gave Trotti for investment in AT Systems. (Friesen Aff. P 10; Friesen's Rule 12(n) Statement P 10.)
As to defendant Joseph E. Phillips, the Receiver enumerates 145 transactions between Phillips and Douglas and/or the receivership entities between November 1987 and April 1989. See Plaintiff's 12(m) Statement, at 9-10 P 21, Exhibit G Attachment 2. In total, the transactions resulted in a net gain to Phillips of $ 377,133.78. Id. The only asserted conveyance disputed by Phillips is one made on September 8, 1989. Report, at 19 n.7. The Report properly resolved this dispute in favor of the plaintiff.
By order entered on November 30, 1989, this court appointed Steven S. Scholes as the equitable receiver for Douglas and the investment entities. As Receiver, Scholes is charged with the responsibility of taking possession of and liquidating all choses in action and other property of Douglas and the receivership entities and of pursuing their assets and claims. As part of his responsibility, the Receiver filed this action against a number of individuals who invested funds with Douglas or one of the receivership entities and received payments from Douglas or one of those entities in excess of the amounts invested.
The plaintiff's complaint presents three claims for relief: (1) fraudulent conveyance (Count I); (2) unjust enrichment (Count II); and (3) constructive trust (Count III). The Receiver has moved for summary judgment on all three counts against Friesen and Phillips. In her October 13, 1993, Report and Recommendation ("Report") on the motion, Magistrate Judge Pallmeyer recommended granting plaintiff's motion as to Counts I and II against both defendants and recommended denying the plaintiff's motion as to Count III. Scholes v. Ames, 1993 U.S. Dist. LEXIS 14510, No. 91 C 2419 (N.D. Ill. Oct. 13, 1993) (Report and Recommendation of Magistrate Judge Pallmeyer). Both sides submitted Objections to the Report and Responses to the others' Objections.
Summary judgment "shall be rendered forthwith if the pleadings, depositions, answers to interrogatories and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law. FED. R. CIV. P. 56(c). Only factual disputes that could have an effect on the outcome of the suit should prevent the entry of summary judgment. Factual disputes that are irrelevant or unnecessary have no bearing on a motion for summary judgment. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 91 L. Ed. 2d 202, 106 S. Ct. 2505 (1986). Furthermore, the court must be cognizant of the standard to apply to the recommendation made by the Magistrate Judge in the Report. Pursuant to 28 U.S.C. § 636(b)(1)(C), this court will make a " de ...