Donell v. Kowell

Robert Kowell (defendant) invested $22,858.92 with JT Wallenbrock & Associates (Wallenbrock). Wallenbrock told roughly 6,000 investors that their money was providing working capital to latex-glove manufacturers in Malaysia. Wallenbrock promised investors a 20 percent return on their investments every 90 days. Kowell subsequently received and spent returns from Wallenbrock totaling over $73,000. However, unbeknownst to Kowell, Wallenbrock’s purported investment program was actually a Ponzi scheme in which Wallenbrock’s officers took investors’ money and used the money to pay off earlier investors, among other things. In 2002, the Securities and Exchange Commission brought a civil enforcement action against Wallenbrock. Wallenbrock was placed into a receivership, and James Donell (plaintiff) was appointed receiver. Donell notified Kowell of Wallenbrock’s Ponzi scheme and told Kowell that a federal court had authorized Donell to recover profits paid to the 800 investors who had profited from the scheme, including Kowell. Kowell disputed his liability, asserting that he was a good-faith investor and should not be required to return his profits. Donell sued Kowell in a California federal district court, seeking to avoid the monetary transfers to Kowell as fraudulent and to recover the money under the Uniform Fraudulent Transfer Act (UFTA), codified in California as California Civil Code § 3439.04(a). Donell alleged that the payments to Kowell constituted actual fraud because Wallenbrock had made the payments with the intent to hinder, delay, or defraud Wallenbrock’s noteholders. Donell also alleged that the payments constituted constructive fraud because the payments made to Kowell over his initial investment amounts had been made without Kowell giving Wallenbrock a reasonably equivalent value in exchange. The district court compared Kowell’s investments to the amounts Kowell received and concluded that Kowell was liable under § 3439.04, though the court did not specify whether liability was based on actual or constructive fraud. After applying UFTA’s four-year statute of limitations to the transfers, the court ordered Kowell to repay net profits of $26,396.10, plus prejudgment interest. Kowell appealed.