Estate of Cruz v. Peffley , 2023 Ohio 2081 ( 2023 )

[Cite as Estate of Cruz v. Peffley, 2023-Ohio-2081.]
IN THE COURT OF APPEALS OF OHIO
SECOND APPELLATE DISTRICT
MONTGOMERY COUNTY
ESTATE OF RAFAEL M. CRUZ, et al. :
:
Plaintiffs-Appellees : Appellate Case No. 29435
:
v. : Trial Court Case No. 2018-CV-5142
:
DANIEL PEFFLEY, et al. : (Civil Appeal from
: Common Pleas Court)
Defendants-Appellants :
:
...........
OPINION
Rendered on the 23rd day of June, 2023.
...........
TOBY K. HENDERSON, Atty. Reg. No. 0071378, BRYAN K. PENICK, Atty. Reg. No.
0071489, & KAITLYN C. MEEKS, Atty. Reg. No. 0098949, 1900 Stratacache Tower, 40
North Main Street, Dayton, Ohio 45423
Attorneys for Plaintiffs-Appellees
MICHAEL P. MCNAMEE, Atty. Reg. No. 0013861, GREGORY B. O’CONNOR, Atty. Reg.
No. 0077901, ALEXANDER W. CLOONAN, Atty. Reg. No. 0095690, 2625 Commons
Boulevard, Beavercreek, Ohio 45431
Attorney for Defendants-Appellants
.............
LEWIS, J.
{¶ 1} Defendants-Appellants Chad Leopard, Joe Leopard, and Joe’s Landscaping
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of Beavercreek, Inc. (collectively, “Defendants”) appeal from a judgment in favor of 12
Plaintiffs following a jury trial. Defendants contend that (1) the trial court erred by
granting summary judgment to Plaintiffs on the issue of whether Plaintiffs had filed their
fraudulent transfer claims within the statute of limitations; (2) the trial court erred in
denying Defendants’ motion for summary judgment on the issue of whether Plaintiffs had
standing to sue; (3) the judgment against Defendants was against the manifest weight of
the evidence because Plaintiffs failed to mitigate their damages; (4) the judgment against
Defendants was against the manifest weight of the evidence because nine of the twelve
Plaintiffs did not provide any evidence of good faith; and (5) the judgment against Chad
Leopard was against the manifest weight of the evidence to the extent that he was not
credited with an initial cash investment of $25,000.
{¶ 2} For the reasons that follow, we will reverse the judgment to the extent that it
entered judgment in favor of the nine non-testifying Plaintiffs as against the manifest
weight of the evidence due to their failure to present the jury with any evidence that they
invested in good faith. In all other respects, the judgment of the trial court will be
affirmed. The cause will be remanded to the trial court for further proceedings consistent
with this opinion.
I. Facts and Course of Proceedings
{¶ 3} The facts underlying this case involve a Ponzi scheme orchestrated over
several years by its operator, William Apostelos. The key to a Ponzi scheme is to funnel
proceeds received from new investors to previous investors under the guise that these
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funneled proceeds were profits from a legitimate business venture. See, e.g., In re
Ramirez Rodriguez, 209 B.R. 424, 430 (Bankr.S.D.Tex.1997). By doing so, the operator
of the Ponzi scheme, in this case Apostelos, creates an illusion that a legitimate profit-
making business opportunity exists, which then induces further investment. Id.Typically, investors are promised high rates of return, and initial investors obtain a greater
amount of money from the Ponzi scheme than those who join the Ponzi scheme later.
Id. “As a result of the absence of sufficient, or any, assets able to generate funds
necessary to pay the promised returns, the success of such a scheme guarantees its
demise because the operator must attract more and more funds, which thereby creates
a greater need for funds to pay previous investors, all of which ultimately causes the
scheme to collapse.” Id. The promised rates of return to investors render a Ponzi
scheme operator like Apostelos insolvent from the scheme's inception, because the
returns exceed any legitimate investments. Id. at 430-431.
{¶ 4} For approximately eight years, Apostelos used several business entities to
disguise his Ponzi scheme as a legitimate business venture. He also used family
members and attorneys to make people feel more comfortable investing with him.
Apostelos masked his Ponzi scheme by explaining to investors that he was able to offer
high rates of return by issuing high interest, short-term loans and by investing heavily in
apartment buildings, asphalt companies, stocks, gold and silver, racehorses, farm
equipment, and strategically-located land. With some investors, he allowed them access
to Ameritrade accounts showing positive returns on stock investments. Apostelos also
convinced some early investors to write referral letters to potential investors. Apostelos
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reassured many investors by signing promissory notes when they invested. He was able
to infiltrate legitimate businesses like car dealerships to such an extent that they trusted
management of the funds contained in their retirement plans to Apostelos. But like all
Ponzi schemes, no matter how skilled the operator is at artifice, the scheme had to end.
{¶ 5} In the summer and fall of 2014, some investors noticed that Apostelos was
late on payments and checks started bouncing. This culminated in some investors filing
an involuntary bankruptcy proceeding against Apostelos in the fall of 2014. Around the
same time, the FBI raided Apostelos’ office in Springboro. Soon thereafter, the United
States filed a forfeiture complaint against Apostelos, and the bankruptcy trustee began
seeking financial information from banks that had processed transactions involved in the
Ponzi scheme. Apostelos ultimately pled guilty in 2017 for his role in masterminding a
multi-million-dollar Ponzi scheme. During the criminal case, including through his
sentencing and appeal, the government withheld the records seized from Apostelos.
{¶ 6} News stories broke about the Ponzi scheme soon after the FBI raided
Apostelos’ offices. The Ponzi scheme had officially collapsed. The fallout was wide and
severe. Overall, Apostelos had received money from investors totaling almost 79 million
dollars. Although he paid approximately 67 million dollars to many of these same
investors to keep the Ponzi scheme going, many investors were left with huge losses.
{¶ 7} In February 2018, the bankruptcy trustee announced that it intended to
dismiss the bankruptcy case involving Apostelos. Some of the Ponzi scheme victims
then filed suit in state court and served subpoenas on the banks that had been involved
with the entities involved in the Ponzi scheme. The victims also sought information from
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the Department of Justice and the FBI. Ultimately, the victims received sufficient
information to begin identifying the specific transfers from Apostelos to investors in the
Ponzi scheme, including those made to the “net-winners.” Decision Granting Plaintiffs
Motion for Summary Judgment Finding Plaintiffs Timely Filed Their Claims (Nov. 19,
2021), p. 2.
{¶ 8} On November 5, 2018, 30 plaintiffs filed a complaint in the Montgomery
County Court of Common Pleas against 75 defendants, asserting fraudulent transfers of
funds in violation of the Ohio Uniform Fraudulent Transfer Act, R.C. 1336.04. According
to the complaint, the 30 plaintiffs were “net-losers” in the Apostelos Ponzi scheme, and
the 75 defendants were “net-winners” in the scheme. A net-winner was someone who
received more money from Apostelos and his related entities than they had invested with
him. A net-loser was someone who received less money from Apostelos and his related
entities than they had invested with him.
{¶ 9} On December 13, 2019, at the trial court’s direction, the Plaintiffs filed a first
amended complaint adding Apostelos as a defendant. Over the course of the next two
years, the parties filed numerous motions for summary judgment; the rulings on a couple
of those motions are the subject of the current appeal. Further, several parties were
voluntarily dismissed from the action, and a few parties were replaced by their estates
due to deaths that occurred while the case was pending. By the time the case proceeded
to trial, only twelve plaintiffs and five defendants remained.
{¶ 10} The jury trial was held in January 2022. The evidence presented about the
investments of various Individuals was as follows:
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{¶ 11} Soneet Kapila, a certified public accountant and expert in forensic
investigations, testified first at the trial. Trial Tr. 97-320. Kapila explained that
Apostelos had raised $78,830,000 and had paid out $67,240,000 to investors.
According to Kapila, Plaintiff’s Exhibit 42-C was a list of net-winners under the Ponzi
scheme. He conceded that the list of net-winners did not include a stipulation involving
Joe Leopard. Plaintiff’s Exhibit 42-D was a list of net-losers that Kapila compiled. On
cross-examination, Kapila noted that he had not credited any alleged cash investments
in his chart unless he received sufficient supporting documentation. He agreed that an
individual on his chart of net winners could decrease the amount of his net winnings by
showing a cash investment. In making his report, Kapila relied on counsel’s
representations and source documentation.
{¶ 12} Kapila opined that a 50% interest rate included in a promissory note should
be a red flag for an investor. One of Plaintiff Gloria Cruz’s promissory notes with
Apostelos included a 50% interest rate. Kapila also agreed that discovering that an
enterprise is insolvent is a warning sign, and that post-dated or bounced checks would
be a cause for concern.
{¶ 13} Kapila conceded that there were some individuals with higher net gains than
the Defendants in this case who were not sued by the Plaintiffs. Kapila was not asked
to determine whether any of the Defendants had invested in good faith. He conceded
that he could not trace every dollar in the Ponzi scheme to a particular person, because
the funds were commingled. For example, he could not determine whether the particular
money invested by the Plaintiffs in this case ended up in the possession of the particular
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Defendants in this case. Kapila agreed that some of the Plaintiffs in this action received
payments from Apostelos after investing money with him.
{¶ 14} Plaintiff John Goodman, one of the investors in the Ponzi scheme, testified
next. Trial Tr. 321-366. He had lived in Virginia for 30 years and was referred to
Apostelos by his long-time friend, Paul Walter. Goodman met with Apostelos in late April
or early May 2014. He asked Apostelos about the expected profit, and Apostelos
explained that he owned and traded in racehorses and used farm equipment. Goodman
had faith in Apostelos when he invested with him. He received two payments totaling
$50,000 from Apostelos. But Goodman learned in late September 2014 that the FBI was
investigating Apostelos. He attempted to contact Apostelos, asking that $300,000 of his
$350,000 be returned. Apostelos did not respond. The FBI talked to Goodman in
October 2014.
{¶ 15} Goodman conceded that he had not consulted with his wife, financial
advisor, or tax preparer before investing with Apostelos. His wife told him that he lacked
wisdom and that she would not have approved of the investment with Apostelos if he had
consulted her. Further, Goodman did not conduct a background check on Apostelos or
any type of internet search. Goodman believed the promissory notes given to him by
Apostelos were binding and sufficient to keep track of his business dealings.
{¶ 16} Plaintiff Dr. Rafael F. Cruz (“Rafael”) testified next. Trial Tr. 375-520. He
is related to Rafael M. Cruz (his father), Gloria Cruz (sister), Joe Mullane (brother-in-law),
Alexander Mullane, and some of the other Plaintiffs. A friend of Rafael’s, Dr. Lou Pilati,
introduced him to Apostelos. Rafael met with Apostelos and learned that he used
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promissory notes. Apostelos mentioned many investments with which he was involved,
including apartment buildings, land, and a variety of farms. After Rafael made a $70,000
investment with Apostelos, Dr. Scott Doak vouched for Apostelos. Rafael spoke with Dr.
Pilati and an investment advisor about Apostelos. The investment advisor told Rafael
that Apostelos was not licensed and was not well known. Rafael received one payment
from Apostelos. The remainder of the time, Rafael immediately reinvested any money
that Apostelos paid him.
{¶ 17} Eventually, Rafael considered Apostelos enough of a friend to introduce him
to his family. Sometime around the summer of 2013, Rafael’s father told him and his
sister that there was a tax issue concerning Apostelos’ promise to roll over an investment.
This concerned Rafael. At that time, Rafael found out that his father had invested
approximately $4 million with Apostelos, which resulted in a tax problem of around $1.3
or $1.5 million. Apostelos explained that he was working with the IRS to fix the mistake.
During that time, Apostelos was in bad health with spine problems. Apostelos promised
to sell personal assets to fix the tax problem. Rafael’s father died in April 2020 at the
age of 89; he had relied on Social Security after the fallout from the failed Ponzi scheme,
had divorced his wife, and had lived at different times with Rafael or his daughter.
{¶ 18} Rafael’s sister, Gloria Cruz, lived in New Jersey with her husband, Joe
Mullane. Both Gloria and Joe Mullane invested with Apostelos based on Rafael’s
recommendation. Gloria had interviewed Apostelos by phone and met with him.
{¶ 19} According to Rafael, in November 2014, federal authorities raided
Apostelos’ offices. He was indicted in 2016. Rafael testified to a grand jury.
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Eventually, Rafael obtained a judgment against Apostelos.
{¶ 20} Rafael testified that he had believed what he was told about Apostelos and
had invested his money with Apostelos in good faith. When Apostelos was in bad health,
Rafael had helped him move some equipment, because he trusted Apostelos.
According to Rafael, his trust in Apostelos increased over time. Even when the tax issue
with his father came up, Rafael continued to trust Apostelos, because he assumed the
tax issue had arisen because Apostelos’ health was declining.
{¶ 21} On cross-examination, Rafael testified that he believed all those who had
invested with Apostelos had invested in good faith. At that time, Elizabeth Nickell was
Rafael’s girlfriend and had invested with Apostelos, but Rafael did not know how much
she had invested. Leah Cruz is Rafael’s stepmother; he did not have a good relationship
with her. Rafael left it up to his attorney who to sue. At the time Rafael invested with
Apostelos, Rafael’s financial advisor at USB had told him to be cautious. Rafael
eventually stopped using this financial advisor, because Rafael’s calls were not returned
and USB’s performance had not met his expectations.
{¶ 22} Apostelos guaranteed a 10-15% return on investments. He did not charge
Rafael any fees but explained that he would keep any return on investment above the
guaranteed return rate. Although Apostelos did not provide quarterly reports as he had
promised to do, Rafael was given two or three reports that looked good. Further, he
received reassurances from Dr. Doak and Dr. Pilati.
{¶ 23} Rafael referred his father to Apostelos. Based on Apostelos’ good
reputation and his lies, Rafael believed that the tax problem involving his father would be
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worked out. During the summer of 2014, Rafael sent several emails to Apostelos
expressing concerns about his father’s IRS problem. It was a hectic time for Rafael when
Apostelos signed a personal guarantee to take care of his father’s tax problem. By
August 2014, Rafael believed that Apostelos was liquidating some assets to take care of
the tax problem. An attorney associated with Apostelos told Rafael that he was
addressing the tax problem and would take care of it.
{¶ 24} Rafael believed that Ameritrade should have had a mechanism for catching
Apostelos’ fraud. Defendant Daniel Peffley called Rafael for help. According to Rafael,
Peffley lied and said he was a victim when in fact he was a net-winner under the Ponzi
scheme. Pursuant to Peffley’s request, Rafael drafted an email to be sent to television
stations and newspapers.
{¶ 25} Plaintiff Mike Harvey testified next. Trial Tr. 521-601. Harvey was
originally from Kettering but lived in Indiana at the time of trial. His father had married
Linda Dennis, whose son Jason Dennis had been investing with Apostelos for quite a
while. Harvey’s father began investing with Apostelos in December 2012. Harvey’s
father had asked Apostelos for collateral or a guarantee before he recommended
Apostelos to his family. Apostelos lied and gave Harvey’s father a farm as a guarantee.
Harvey’s father went out and saw the property.
{¶ 26} Harvey, Andrew White, and Harvey’s father drove to Indianapolis to meet
with Apostelos. Dwight Wallace, the best friend of Harvey’s father, also met with them.
Apostelos was impressive and made sense. According to Apostelos, he was giving out
high-interest, short-term loans to companies who needed them. He also was investing
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in farms, asphalt companies, and real estate. Apostelos did not provide the men with
any information as to whom Apostelos was loaning money or their financial stability.
Harvey drove to Dayton for a second meeting with Apostelos and was impressed by the
set-up of Apostelos’ office. Harvey’s wife at the time, Kristen Harvey, became interested
in investing, and Harvey traveled with her to a third meeting with Apostelos. At that time,
they met with Steve Cudder, an attorney in Dayton, and that meeting inspired more
confidence in Apostelos. Harvey’s mother (Carolyn Hedderly) became interested in
investing with Apostelos as well and met with him. Harvey was not at that meeting.
Harvey also talked with his sister about Apostelos.
{¶ 27} In October 2014, Harvey’s father called him and reported that there were
chains on the doors of Apostelos’ office. Harvey immediately began crying and was
devastated. He told his wife. Harvey’s net loss was over $200,000. With the losses
incurred by his now ex-wife, they had a total net loss of over $500,000. Harvey did not
believe the rollovers of investment earnings with Apostelos were included in the expert’s
report.
{¶ 28} Harvey believed he had done a search on the internet about Apostelos
before investing, but he could not remember for certain. Also, he thought their
stockbroker may have warned his wife about rolling over an IRA. October 2014 was the
first time that Harvey suspected any wrongdoing by Apostelos. Prior to that, Harvey had
received some money back from his investments with Apostelos. For example, in July
2014, Harvey needed to pay off his home equity line. Although Apostelos delayed the
payment by giving an excuse that the money was tied up, he eventually paid the money
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to Harvey.
{¶ 29} Harvey eventually spoke with the FBI, and Harvey’s father hired an attorney.
The FBI told Harvey that suing Apostelos was a waste of time. The FBI had seized
Apostelos’ assets, and Harvey relied on the government to chase the assets. Harvey
had received a small check from the government years earlier and believed he would
receive more if the government recovered additional assets from Apostelos.
{¶ 30} Harvey had entered into an agreement with his ex-wife pursuant to which
any money recovered from the Defendants in this lawsuit was to be split 70/30 in his ex-
wife’s favor. Because his father had passed away, Harvey would receive 50% of any
recovery on behalf of his father as one of his father’s two beneficiaries. Harvey’s ex-wife
would not receive any of those proceeds.
{¶ 31} The deposition of Shawn Anthony Stoner was read into the record at trial.
Trial Tr. 602-617. He was a licensed attorney in North Carolina who had met with
Apostelos on three occasions. When he went to Apostelos’ office, Attorney Scudder,
Scott Doak, and Apostelos’ wife and sister were there. Apostelos showed him stock
portfolios of clients like Rafael Cruz. During their third meeting, Apostelos wanted
additional investment income to purchase land near interstate exits. Stoner had been
introduced to Apostelos through Lee Struck, who had been introduced to Apostelos by
Cliff Bostrom.
{¶ 32} The deposition of Racey Morris was read into the record at trial. Trial Tr.
617-632. Morris was a financial advisor with New York Life. He had been introduced
to Apostelos through a business partner and had met with Apostelos six or seven times.
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Apostelos had offered Morris commissions and referral fees, but Morris had not referred
anyone to Apostelos. Morris had invested with Apostelos and was promised 20% interest
on his investment. Apostelos told him that he was investing in real estate deals. Morris
trusted the individual who had referred him to Apostelos, so Morris did not investigate
Apostelos. The promised return on investment would increase if Morris gave Apostelos
more money. Morris invested his money in good faith, believing that the money was
being generated legally from real estate deals. He did not suspect any wrongdoing with
Apostelos until checks started bouncing and promissory notes were not paid.
{¶ 33} The deposition of Jeffrey Paul Santilli was also read into the record at trial.
Id. at 632-646. Santilli was a dentist who lived in New Albany. He met Apostelos
through Shawn Stoner, with whom he had been friends since 1990. Stoner had
explained to Santilli that Apostelos had several ways to make money. Santilli had two
meetings with Apostelos, during which he learned that Apostelos made money through
stock options, real estate, foreclosures, and horses. Based on Stoner’s
recommendations and his meetings with Apostelos, Santilli felt comfortable investing with
Apostelos. He invested his money with Apostelos in good faith and initially did not
suspect any fraud or wrongdoing. His first suspicions that Apostelos may have been
doing something wrong with Santilli’s investment occurred in the middle of 2013 when
Apostelos was late on a payment. Typically, Santilli would be promised 15-25% interest
on his investments with Apostelos.
{¶ 34} The deposition of Paul Riedel was read into the record at trial. Trial Tr.
647-653. Todd Case, the finance manager at Beau Townsend Ford, a car dealership,
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had given Riedel positive information regarding Apostelos. One of the sales managers
there had called the State of Ohio to investigate Apostelos and was told that Apostelos
was fine. Riedel met Apostelos, who provided him with assurances. Apostelos
explained that he made his money in real estate, gold, silver, and the stock market.
Riedel began investing with Apostelos in September 2008.
{¶ 35} The deposition of Joshua Otstot was read into the record at trial. Trial Tr.
654-678. Otstot worked at Beau Townsend Ford. Todd Cade, a finance employee at
the dealership, had recommended Apostelos, who supposedly made his money through
purchasing land and gold. At some point, Apostelos took over the investments for Beau
Townsend’s retirement plan. Apostelos even had his own office at Beau Townsend.
Otstot waited for a while, then began investing with Apostelos. Otstot completely trusted
Apostelos and invested his money with him in good faith, receiving several payments from
Apostelos based on a 10-14% interest rate. Otstot eventually heard about the raid of
Apostelos’ offices.
{¶ 36} The deposition of Johnny Davis was read into the record. Trial Tr. 678-
685. Jason Dennis had introduced him to Apostelos. Davis started investing when
others at his place of employment began investing. He also introduced his wife, Carrie,
to Apostelos.
{¶ 37} The deposition of Sara Dorman was read into the record at trial. Trial Tr.
685-691. She lived in Columbus, Ohio, and worked as an occupational therapist. Her
father, Larry Dorman, recommended Apostelos to her. Her father worked at Beau
Townsend Ford. Sara met with Apostelos twice. It was her understanding that
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Apostelos invested in property and horses. She found out from her father that Apostelos
went to jail. Sara had invested $20,000 with Apostelos in April 2014 and received
$31,000 back in June 2014.
{¶ 38} The deposition of Jason Lane Gober was read into the record at trial. Trial
Tr. 692-706. He had met Apostelos through his friend, Lonnie Wilkey, Jr., after Gober
won the lottery. It was his understanding that Apostelos flipped real estate. Gober met
with Apostelos over 50 times and typically picked up checks at Apostelos’ offices. He
was not aware of Apostelos’ wrongdoing until the Dayton Daily News published an article,
which was shown to Gober by a Wesbanco bank manager. Gober’s wife had known
Apostelos’ son-in-law since they were kids. Gober had invested about $500,000 with
Apostelos and got checks each month. There were some delays in payments to Gober
a couple of months before the Dayton Daily News published a story about Apostelos’
suspected wrongdoing. Gober stated that he had invested his money in good faith.
{¶ 39} Chad Leopard testified at trial. Trial Tr. 721-765. Chad lived in
Beavercreek, and he had been the owner of Joe’s Landscaping since 2019. His father,
Joe Leopard, was the previous owner. Joe Leopard had undergone brain surgery and
did not testify at trial. Chad knew the following people who had invested with Apostelos:
his father, his brother Steve and his wife, his uncle Randy and his wife, Jeff Columbro,
Jason Dennis, and his wife’s cousin, Tony Michael. All his family members had been
net-winners, except for Chad’s uncle and his brother, who had been net-losers.
{¶ 40} Jeff Columbro, a salesman at Beau Townsend Ford, had referred Chad to
Apostelos in 2010 and 2013. Columbro mentioned a lot of people who were investing
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with Apostelos, including the Cruzes “and all the big influential people in the Dayton area.”
Chad had also spoken with Jason Dennis about investing with Apostelos. Chad and his
father drove to Apostelos’ office, and both gave cash to Apostelos during their first
meeting. Apostelos added the money to an Ameritrade account and gave Chad and his
father account numbers so that they could track the account. This first investment took
place in July 2013. After this first investment, Apostelos asked Chad if he wanted to be
a part of an equipment loan. Tony Michael hired an attorney to check out the legitimacy
of the equipment loan. According to Chad, the investigation came back okay so Chad
went ahead with the investment. If that investigation had revealed anything wrong with
Apostelos, Chad would not have invested further with him. The parties stipulated to this
fact.
{¶ 41} Chad stated that he had personally paid $111,500 to Apostelos in three
payments of $58,500, $15,000, and $38,000. Chad made the $58,500 payment in cash
to Apostelos at their first meeting. This cash came from Chad’s safe in his basement
with money he had accumulated from selling hot rod cars. Chad had received seven
payments from Apostelos totaling $245,000. Therefore, Chad profited $133,500 from
the Ponzi scheme. Joe’s Landscaping invested $25,000 but received a $60,000
payment, resulting in a $35,000 profit from the Ponzi scheme. Chad conceded that he
had testified at his previous deposition that he only contributed $25,000 in cash at the first
meeting with Apostelos. According to Chad, he changed his testimony at trial because
the higher amount was the amount reflected on Apostelos’ records. He relied on the
accuracy of Apostelos’ records in making that claim. Chad stated that he had not shared
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any of his profit from the Ponzi scheme to his brother or uncle, who were net-losers.
{¶ 42} Karen Ann Evans testified at the trial. Trial Tr. 766-798. She lived in
Centerville and was a geriatric psychologist. Defendant Ruth Peters was her mother. A
realtor showed Evans a house in 2007 that Apostelos owned. Apostelos helped her
cover part of the loan, which allowed her to buy the house. She invested all $70,000 of
her retirement money with Apostelos, and he then wrote her a promissory note, which
promised 35% interest each year. She had received monthly checks from Apostelos’
company. Ruth Peters gave Apostelos $20,000. Evans began working for one of
Apostelos’ companies as a loan officer. She was not alerted to any wrongdoing, and she
did not work very long at that job. Evans did not believe there were any winners in the
Ponzi scheme. She explained that she did not have any money in the bank from this
scheme and that she could not afford the home Apostelos sold her. Evans was surprised
she had been sued, because Plaintiffs’ counsel appeared to be helping all the victims of
the Ponzi scheme before the lawsuit began. Evans eventually was dismissed from the
lawsuit.
{¶ 43} In 2007, Apostelos asked Evans to write him a letter of recommendation.
Daniel Peffley called her in response to the letter and she spoke with him. If she had
known then what she knew at the time of the trial, she would not have written a letter of
recommendation for Apostelos. In early 2013, it came to Evans’ attention that some
direct deposit payments from Apostelos to investors had not been on time. As a result,
Evans asked if Apostelos would go back to paying her by check. Apostelos mentioned
to Evans that a $1.2 million payment to Daniel Peffley failed due to some problems with
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“pinging,” where the money showed up briefly in Peffley’s account but then just
disappeared. Evans was aware that there had been a bankruptcy proceeding from 2014
to 2018 and that a criminal proceeding against Apostelos had resulted in the seizure of
all his assets.
{¶ 44} Defendant Daniel Peffley testified at the trial. Trial Tr. 816-955. He had
been born in Dayton but lived in Garden Grove, California, with his wife, Judy, at the time
of trial. He had retired in 2006. His brother Tim worked at Beau Townsend Ford. In
late 2007 or early 2008, Tim had called him about investing with Apostelos.
Subsequently, Apostelos provided Peffley with eight references and a personalized letter.
Peffley spoke with each reference, all of whom had been investing with Apostelos for
years. Peffley initially invested $300,000 in January 2008; he was promised a 31%
return on that investment. Peffley did not have any concerns about Apostelos, because
Apostelos had signed promissory notes on which he could not renege. Peffley referred
Apostelos to Dennis Thompson. Peffley made another investment of $622,400 in return
for a promise of 40% interest.
{¶ 45} Peffley recalled one time in 2010 when he was in the car with Apostelos in
Dayton, Ohio, and Peffley asked if they could stop and talk to one of Apostelos’ tenants.
According to Peffley, Apostelos “got - - he about freaked when I did that.” Apostelos had
sent an email to Peffley in September 2013 about Peffley’s request to close some
accounts. Apostelos asked Peffley to stop slandering him to other clients. Four or five
checks from Apostelos had bounced when Peffley tried to cash them. Peffley contacted
a federal judge he knew from high school, who referred him to an attorney at a law firm.
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As a result, on September 25, 2014, Peffley obtained a judgment against Apostelos in
Warren County, Ohio for $1,276,169. Peffley attempted to assist victims of the Ponzi
scheme by contacting news organizations and completing a victim impact statement.
Peffley never gave any investment advice to the Plaintiffs in this lawsuit. He had spent
over $100,000 to defend himself in this lawsuit.
{¶ 46} Robert Hanseman, an attorney, testified last at the trial. Trial Tr. 963-974.
In November 2014, while employed as an attorney for a law firm in Dayton, Hanseman
was quoted in a Dayton Daily News article as saying, “Anytime anyone guarantees a
return, that’s a danger sign.” Hanseman testified that this quote needed clarification.
According to Hanseman, the promise of “an unduly high-rate risk of return” is more of an
issue. On October 15, 2014, Hanseman filed an involuntary bankruptcy proceeding
against Apostelos in the United States Bankruptcy Court in Dayton, Ohio on behalf of
Gloria Cruz, Joseph Mullane, and Rafael Cruz (the father). All three of these clients had
obtained default judgments against Apostelos in the Warren County Court of Common
Pleas. In the filing, Hanseman also directed the Bankruptcy Court’s attention to the
judgment Peffley had obtained against Apostelos.
{¶ 47} At the conclusion of the trial, the jury found that the Plaintiffs had suffered
the following net losses from investing in the Ponzi scheme: the Estate of Rafael M. Cruz,
Sr. ($1,960,688); Rafael F. Cruz, Jr. ($647,009); Gloria Cruz ($290,000); Joseph Mullane
($242,500); Carolyn Hedderly f.k.a. Harvey ($235,262); Kristen Harvey ($281,693); the
Estate of Steve Harvey ($1,392,105); John and Rebecca Riccobono ($330,000); Michael
Harvey ($234,678); Andrew White ($188,344); and John Goodman ($350,000). The jury
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returned verdicts in favor of all 12 Plaintiffs for the following: $192,050 against Chad
Leopard, $169,500 against Joe Leopard, and $35,000 against Joe’s Landscaping.1
{¶ 48} The trial court entered judgment in favor of the Plaintiffs against Defendants
in the amounts reflected in the jury verdicts. Defendants filed a timely notice of appeal
from the trial court’s judgment.
I. Plaintiffs’ Claims Were Brought Within One Year of When the Fraudulent
Transfers Were Discovered or Reasonably Could Have Been Discovered
{¶ 49} Defendants’ first assignment of error states:
THE TRIAL COURT ERRED IN ITS SUMMARY JUDGMENT
DECISIONS REGARDING PLAINTIFFS’ COMPLIANCE WITH THE
STATUTE OF LIMITATIONS FOR FRAUDULENT TRANSFER CLAIMS,
SET FORTH IN R.C. § 1336.09(A).
{¶ 50} This assignment of error addresses the trial court’s summary judgment
ruling that Plaintiffs had filed their claims under the Ohio Uniform Fraudulent Transfer Act
within the applicable statute of limitations.
{¶ 51} Appellate review of a trial court's ruling on a summary judgment motion is
de novo. Schroeder v. Henness, 2d Dist. Miami No. 2012-CA-18, 2013-Ohio-2767, ¶ 42.
De novo review “ ‘means that this court uses the same standard that the trial court should
have used, and we examine the evidence to determine whether as a matter of law no
1 The jury also returned verdicts in favor of all 12 Plaintiffs against Defendants Daniel
Peffley and Ruth Peters, but those Defendants were the subject of agreed orders of
dismissal with prejudice prior to the entry of final judgment in this matter.
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genuine issues exist for trial.’ ” Riverside v. State, 2016-Ohio-2881, 64 N.E.3d 504, ¶ 21
(2d Dist.), quoting Brewer v. Cleveland City Schools Bd. of Edn., 122 Ohio App.3d 378,
383, 701 N.E.2d 1023 (8th Dist.1997). On such review, we do not grant deference to the
trial court's determinations. Powell v. Rion, 2012-Ohio-2665, 972 N.E.2d 159, ¶ 6 (2d
Dist.).
{¶ 52} Pursuant to Civ.R. 56(C), summary judgment is proper when (1) there is no
genuine issue as to any material fact, (2) the moving party is entitled to judgment as a
matter of law, and (3) reasonable minds, after construing the evidence most strongly in
favor of the nonmoving party, can only conclude adversely to that party. Zivich v. Mentor
Soccer Club, Inc., 82 Ohio St.3d 367, 369-370, 696 N.E.2d 201 (1998). The moving
party carries the initial burden of affirmatively demonstrating that no genuine issue of
material fact remains to be litigated. Dresher v. Burt, 75 Ohio St.3d 280, 292, 662 N.E.2d
264 (1996). To this end, the movant must be able to point to evidentiary materials of the
type listed in Civ.R. 56(C) that a court is to consider in rendering summary judgment. Id.
at 292-293.
{¶ 53} Once the moving party satisfies its burden, the nonmoving party may not
rest upon the mere allegations or denials of its pleadings. Id. at 293. Rather, the burden
then shifts to the nonmoving party to respond, with affidavits or as otherwise permitted by
Civ.R. 56, setting forth specific facts that show that there is a genuine issue of material
fact for trial. Id. Throughout, the evidence must be construed in favor of the nonmoving
party. Id.
{¶ 54} “Application of a statute of limitations presents a mixed question of law and
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fact; when a cause of action accrues is a question of fact, but in the absence of a factual
issue, application of the limitations period is a question of law.” (Citation omitted.)
Schmitz v. NCAA, 155 Ohio St.3d 389, 2018-Ohio-4391, 122 N.E.3d 80, ¶ 11.
{¶ 55} Ohio’s Uniform Fraudulent Transfer Act provides for a four-year statute of
limitations, with a one-year discovery rule. R.C. 1336.04(A)(1) provides: “A transfer
made or an obligation incurred by a debtor is fraudulent as to a creditor, whether the claim
of the creditor arose before, or within a reasonable time not to exceed four years after,
the transfer was made or the obligation was incurred, if the debtor made the transfer or
incurred the obligation in either of the following ways: (1) With actual intent to hinder,
delay, or defraud any creditor of the debtor; * * *.” Due to their nature, all Ponzi scheme
transfers are considered to be made with actual intent to hinder, delay, or defraud its
creditors. In re Ramirez Rodriguez, 209 B.R. 424, 433 (Bankr.S.D.Tex.1997), citing a
collection of cases.
{¶ 56} Further, R.C. 1336.09 provides, in part:
A claim for relief with respect to a transfer or an obligation that is
fraudulent under section 1336.04 or 1336.05 of the Revised Code is
extinguished unless an action is brought in accordance with one of the
following:
(A) If the transfer or obligation is fraudulent under division (A)(1) of
section 1336.04 of the Revised Code, within four years after the transfer
was made or the obligation was incurred or, if later, within one year after the
transfer or obligation was or reasonably could have been discovered by the
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claimant[.]
{¶ 57} In this first assignment of error, Defendants contend that the four-year
statute of limitations for fraudulent transfer claims expired well before Plaintiffs
commenced their action. Further, Defendants argue the one-year discovery period
provided for in R.C. 1336.09(A) began in 2014 when the transfers and their fraudulent
nature were discoverable by the Plaintiffs or their counsel through Apostelos’ involuntary
bankruptcy. Appellants’ Brief, p. 13. According to Defendants, “having acknowledged
that [Plaintiffs] not only had access to, but in fact had, the banks, account names, and
account numbers through which Apostelos ran his Ponzi scheme as early as November
18, 2014, it simply defies logic to argue that they could not reasonably discovery the
transfers to the [Defendants] and their fraudulent nature until 2018.” Id. at 16. Further,
Defendants contend that Plaintiffs should have asked an associate of Apostelos for the
names of the net-winners from the scheme well before 2018.
{¶ 58} Plaintiffs counter that their fraudulent transfer claims were the property of
the bankruptcy estate until that bankruptcy case was dismissed in July 2018. Thus, if
the Plaintiffs had any obligation to investigate fraudulent transfer claims against
Defendants, it could not have arisen until July 2018, and Plaintiffs sued Defendants on
November 5, 2018, well within the one-year discovery period. Appellees’ Brief, p. 16.
Plaintiffs also note that even if Ohio law obligated Defendants to investigate fraudulent
transfer claims against Defendants before July 2018, Plaintiffs would not have been more
successful than the bankruptcy trustee, which failed to obtain the records necessary to
identify the fraudulent transfers. Id.
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{¶ 59} The trial court agreed with the Plaintiffs. In particular, the trial court found:
It is reasonable to conclude that Plaintiffs knew a Ponzi scheme [may
well have] been operated by Apostelos, but they did not know the
transferees and the transfers. To understand who was a net-winner a
great deal of information would have been necessary. The facts indicate
all that information would not likely have been discovered by Plaintiffs by
pursuing the means suggested by Defendants.
The law and the statute do not commence to run until the Plaintiffs
know the fraudulent nature of the transfers. The Plaintiffs have to know
both the fraudulent nature and the transfers. As indicated, they may have
become aware of the transfer and later learned of its fraudulent nature. Or,
one may reasonably deduce that an individual is engaging in fraudulent
conduct, but not know of the transfer. There has to be unity. The
aggrieved party has to know both before the one (1) year begins to run.
There is little doubt the aggrieved party must make reasonable
inquiry, but that inquiry must be likely to provide specific information that
would allow the recipient to file a bona-fide cause of action against a
probable Defendant.
The court does not agree that filing subpoenas against the four (4)
banks, disclosed by the Chapter 7 Trustee, was likely to disclose all the
transfers, the transferees and the fraudulent nature of the transfers. The
Trustee was not having success obtaining information that was
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comprehensive and detailed. The Trustee had the power of the court and
was having little success. The criminal law enforcement agencies were
resisting. The primary actor, Apostelos, was uncooperative and was
somewhat protected because of his right to remain silent. The banks
would have resisted during 2014, 2015, 2016 and 2017 before the actual
guilty plea.
The post judgment execution would have not been successful. It
would have been a vain and unproductive act given the situation for
Apostelos. Pre-suit discovery is not an unreasonable avenue to pursue,
but there is nothing to suggest the banks would have cooperated prior to
early 2018.
Decision Granting Plaintiff’s Motion for Summary Judgment Finding Plaintiffs Timely Filed
Their Claims (Nov. 19, 2021), p. 4-5.
{¶ 60} Defendants and Plaintiffs cite In re Fair Finance Co., 834 F.3d 651 (6th
Cir.2016), in support of their respective positions in this assignment of error. In that case,
two individuals purchased a financial services company in Northeast Ohio and used it as
a front for a Ponzi scheme, the proceeds of which were used to fund the two operators’
extravagant lifestyles and various struggling business ventures. After the Ponzi scheme
collapsed, the two operators and their chief financial officer were indicted for wire fraud,
securities fraud, and conspiracy. The financial services company entered involuntary
bankruptcy, and the Chapter 7 trustee brought several adversarial proceedings to recover
on behalf of the company’s estate and, by extension, the Ponzi scheme’s unwitting
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investors. Id. at 656.
{¶ 61} The collapse of the Ponzi scheme in Fair Finance was accelerated by an
FBI raid of the headquarters of the financial services company run by the operators of the
Ponzi scheme. The defendant, Textron, argued that the fraudulent transfer claims raised
by the trustee were barred by Ohio’s statute of limitations. The parties agreed that the
only way the claims would be timely was if they fell within the provisions of Ohio’s
fraudulent transfer statute’s one-year discovery rule. But the parties disagreed as to
whether, for purposes of Ohio’s fraudulent transfer statute, discovery occurred when the
transfer was discoverable or when the transfer’s fraudulent nature was discoverable. Id.
at 670-671.
{¶ 62} The Sixth Circuit concluded that both discoveries were necessary to start
the clock ticking on the one-year period:
Throughout each application of the discovery rule, the crux of the
inquiry was not at what point in time the defendant engaged in the allegedly
wrongful conduct but at what point in time the plaintiff possessed or should
have possessed, upon the exercise of reasonable diligence, “actual
knowledge not just that [she] has been injured but also that the injury was
caused by the conduct of the defendant.” * * * Were we to adopt the
interpretation offered by Textron in this case, that the Ohio UFTA's
discovery rule begins to run when a plaintiff discovers, or upon the exercise
of reasonable diligence, could have discovered the mere existence of the
transfer, we would be adopting an application of the discovery rule that is in
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tension with Ohio's broader statute of limitations and discovery rule
jurisprudence— jurisprudence that the Commissioners were aware of when
adopting the UFTA. * * * Rather, Ohio precedent weighs in favor of our
conclusion that § 1336.09(A)’s one-year discovery period begins to run
when a plaintiff discovers or, upon the exercise of reasonable diligence,
could have discovered the transfer and its fraudulent nature. This is
because, absent requiring the actual or constructive discovery of a
transfer's fraudulent nature, application of the discovery rule would continue
to “lead to the unconscionable result that the injured party's right to recovery
c[ould] be barred by the statute of limitations before he is even aware of its
existence.” * * *
(Citations omitted.) Fair Finance. at 672-673.
{¶ 63} We agree with the trial court and the Fair Finance court that Plaintiffs
needed to know of both the transfers and their likely fraudulent nature before the one-
year period began to run. It became clear to everyone in the fall of 2014 that Apostelos
was involved in wrongdoing. The FBI raid on his offices, the stories in the news,
Apostelos’ arrest, and the lawsuits being filed against Apostelos, including an involuntary
bankruptcy proceeding, should have made a reasonable person aware that they had been
defrauded by Apostelos and his related entities. Therefore, at that point, Plaintiffs should
have known that any transfers of which they were aware between Apostelos and any
other person or entity were fraudulent. However, for the one-year period to begin to run,
the Plaintiffs also had to be aware of the actual transfers that occurred between Apostelos
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(and his related entities) and the transferees. While all the Plaintiffs would have been
aware as of the fall of 2014 of their own transfers involving Apostelos, they would not
necessarily have been aware of all the other transfers involving Apostelos and other
transferees.
{¶ 64} In the Fair Finance case, the plaintiffs should have been aware of the
transfer at issue as early as 2004 when it was made part of the public record in offering
circulars filed with the Ohio Division of Securities. In that case, the transfer was known
first, and then the fraudulent nature of the transaction was discovered five years later
when the FBI raided the debtor’s offices and the Ponzi scheme was revealed. The
opposite occurred in the Apostelos Ponzi scheme. Plaintiffs discovered the wrongdoing
of Apostelos before they discovered the actual transfers involving Defendants.
{¶ 65} The question becomes when the Plaintiffs discovered the actual transfers
or should have discovered the actual transfers. It appears to be undisputed that the
Plaintiffs did not actually discover the transfers to Defendants until early 2018, within one
year of when they filed the lawsuit. But that does not end our inquiry, because the statute
of limitations would have expired if they should have discovered the transfers more than
one year before filing the lawsuit.
{¶ 66} The involuntary bankruptcy case of Apostelos began in the fall of 2014.
Once a debtor files for bankruptcy, only the bankruptcy trustee may prosecute a
fraudulent transfer action. William E. Weaner & Assocs., LLC v. 369 West First, LLC, 2d
Dist. Montgomery No. 28399, 2020-Ohio-48, ¶ 94, citing In re Manton, 585 B.R. 630, 635
(Bankr.N.D.Ga.2018). This is because “any property that is recoverable as a result of a
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transfer that is voidable by an unsecured creditor becomes property of the estate.” In re
Manton at 635. Therefore, “the fraudulent transfer action itself is a claim of the estate.”
Id. “Furthermore, ‘[p]roperty of the estate * * * remains property of the estate and
protected by the automatic stay until either the property is distributed, abandoned, or the
case is closed.’ ” 369 West First at ¶ 97, quoting In re Manton at 639.
{¶ 67} The Apostelos bankruptcy case was open for over three years. During this
time, the Chapter 7 Trustee and the U.S. Trustee were unable to gather enough relevant
information to pursue the fraudulent transfer claims against the net-winners. According
to the evidence presented to the trial court in the motion for summary judgment briefing,
the trustees had the names of the entities used by Apostelos in the Ponzi scheme and a
list of the bank account numbers used in the furtherance of the Ponzi scheme. But the
trustees did not have a list of the fraudulent transfers or the identities of the net-winners
who were on the other side of the fraudulent transfers with Apostelos and his associated
entities. Defendants argue that the information in the hands of the trustees was sufficient
to have allowed both the trustee and the Plaintiffs to fill in the missing information if they
had exercised reasonable diligence. We do not agree.
{¶ 68} The evidence presented to the trial court established that Plaintiffs did not
have the identities of the net-winners or the transfers involving these net-winners until
2018. Further, there was no evidence to establish that this information should have been
obtained before that time by Plaintiffs. Rather, Plaintiffs provided sufficient evidence to
the trial court that they had made reasonable efforts in the pursuit of their claims and that
other potential avenues to get this information earlier would have been futile, as
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evidenced by the inability of both the U.S. Trustee and the Chapter 7 Trustee to get the
requisite information during the over three years of the bankruptcy proceeding.
According to evidence submitted by Plaintiffs in their summary judgment motion, the
Chapter 7 Trustee filed ten motions for extensions of time, citing Apostelos’ assertion of
his Fifth Amendment rights and lack of cooperation or compliance with the court’s orders,
as well as the federal government’s refusal to turn over relevant documents seized in the
criminal case. The Chapter 7 Trustee detailed his attempts to obtain documents and
records through discussions with the federal government, discovery requests to
Apostelos’ alleged co-conspirators, and seeking to appear in the civil forfeiture
proceedings against Apostelos. Similarly, the U.S. Trustee explained the difficulties in
getting the information requested from Apostelos. In February 2018, the trustees
announced their intention to dismiss the bankruptcy case.
{¶ 69} In opposition to Plaintiffs’ motion for summary judgment, Defendants
contended that all Plaintiffs had to do was subpoena the banks and they would have
received all the information they needed to identify the relevant transfers and transferees.
But this argument by Defendants ignores the fact that there was an automatic stay in
place during the pendency of the bankruptcy case and Apostelos was not convicted until
2017. Further, until February 2018, it was reasonable to presume that any fraudulent
transfers successfully pursued by the trustees would benefit Plaintiffs in this action. But
in February 2018 it became clear that this was not going to happen. Plaintiffs then
pursued other avenues to seek the information, which eventually worked later in 2018.
Plaintiffs filed suit well within one year of when they discovered the transfers that were
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fraudulent in nature, as well as the identities of the transferees. Therefore, the trial court
did not err in granting summary judgment to Plaintiffs on the issue of whether they brought
their fraudulent transfer claims within the statute of limitations set forth in R.C. 1336.09(A).
{¶ 70} The first assignment of error is overruled.
II. Plaintiffs Had Standing to Sue Under the Ohio Uniform Fraudulent Transfer Act
{¶ 71} Defendants’ second assignment of error states:
THE TRIAL COURT ERRED IN DENYING SUMMARY JUDGMENT
BASED ON LACK OF STANDING AND REAL PARTY IN INTEREST.
{¶ 72} Defendants filed a motion for summary judgment asking the trial court to
find that Plaintiffs did not have standing to sue Defendants under the Ohio Uniform
Fraudulent Transfer Act. The trial court overruled the motion, finding that Plaintiffs had
standing to bring their claims under the Ohio Uniform Fraudulent Transfer Act even
though such claims were at one time part of Apostelos’ bankruptcy estate. Defendants
challenge this summary judgment ruling, framing their second assignment of error as
follows: “[W]hen a debtor fails to disclose potential claims against third parties as assets
of the bankruptcy estate—thus preventing them from being administered—does a
subsequent dismissal of the bankruptcy estate re-vest those claims in the party who held
them pre-bankruptcy (per 11 U.S.C. § 349) or do they remain the province of the
bankruptcy trustee (per 11 U.S.C. § 554)?” Appellants’ Brief, p. 17. Defendants
contend that the debtor’s failure to disclose the claims in the bankruptcy case meant that
the trustee maintained sole standing to pursue them under 11 U.S.C. § 554, even after
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the bankruptcy case was dismissed. Appellants’ Brief, p. 17, citing Kunica v. St. Jean
Fin., Inc., 233 B.R. 46, 54-55 (Bankr.S.D.N.Y.1999).
{¶ 73} Plaintiffs counter that the United States Supreme Court has made it clear
that “once a bankruptcy case is dismissed, the bankruptcy estate disappears and the
parties return to their pre-bankruptcy positions.” Appellees’ Brief, p. 22, citing Czyzewski
v. Jevic Holding Corp., 580 U.S. 451, 466, 137 S.Ct. 973, 197 L.Ed.2d 398 (2017).
Further, Plaintiffs note that Kunica, the case relied on by Defendants, has been widely
discredited and is distinguishable from Defendants’ position. According to Plaintiffs,
“[t]he critical distinction to Kunica is the dismissal in that case occurred after the debtor
had: filed a schedule of assets, filed a reorganization plan, filed amended disclosure
statements, and participated in a voluntary bankruptcy proceeding.” Appellees’ Brief, p.
24, citing Kunica at 50. Plaintiffs then cite to a subsequent United States Second District
Court of Appeals decision that rejected Kunica. Appellees’ Brief, p. 24-25, citing
Crawford v. Franklin Credit Mgmt., 758 F.3d 473 (2d Cir.2014).
{¶ 74} Before addressing the federal bankruptcy code provisions and federal
cases cited by the parties, it is important to review the relevant provisions in Ohio’s
Uniform Fraudulent Transfer Act. R.C. 1336.07 sets forth the remedies of a creditor,
providing, in part:
(A) In an action for relief arising out of a transfer or an obligation that
is fraudulent under section 1336.04 or 1336.05 of the Revised Code, a * * *
creditor, subject to the limitations in section 1336.08 of the Revised Code,
may obtain one of the following:
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(1) Avoidance of the transfer or obligation to the extent necessary to
satisfy the claim of the creditor;
(2) An attachment or garnishment against the asset transferred or
other property of the transferee in accordance with Chapters 2715. and
2716. of the Revised Code;
(3) Subject to the applicable principles of equity and in accordance
with the Rules of Civil Procedure, any of the following:
(a) An injunction against further disposition by the debtor or a
transferee, or both, of the asset transferred or of other property;
(b) Appointment of a receiver to take charge of the asset transferred
or of other property of the transferee;
(c) Any other relief that the circumstances may require.
{¶ 75} Under the plain language of the Ohio Uniform Fraudulent Transfer Act, net-
losers from the Ponzi scheme would have standing to sue Apostelos and net-winners
from the Ponzi scheme to obtain relief related to the fraudulent transfers between
Apostelos and the net-winners. However, while Apostelos’ involuntary bankruptcy
proceeding was pending, the bankruptcy trustee was the sole entity that could bring
claims under the Ohio Uniform Fraudulent Transfer Act against those individuals who had
received money from Apostelos as part of his Ponzi scheme. William E. Weaner &
Assocs., LLC v. 369 W. First, LLC, 2d Dist. Montgomery No. 28399, 2020-Ohio-48, ¶ 94,
citing In re Manton, 585 B.R. 630, 635 (Bankr.N.D.Ga.2018). But the Trustee was
unable to gather sufficient information to pursue such claims and chose to close the
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bankruptcy proceedings without pursuing those claims. The issue then becomes what
happens to the potential claims under the Ohio Uniform Fraudulent Transfer Act once the
bankruptcy proceedings were dismissed.
{¶ 76} 11 U.S.C. Section 349(b)(3) states: “Unless the court, for cause, orders
otherwise, a dismissal of a case other than under section 742 of this title revests the
property of the estate in the entity in which such property was vested immediately before
the commencement of the case under this title.” Further, 11 U.S.C. Section 554(c)
states: “Unless the court orders otherwise, any property scheduled under section
521(a)(1) of this title not otherwise administered at the time of the closing of a case is
abandoned to the debtor and administered for purposes of section 350 of this title.” The
parties disagree over the effect of these bankruptcy code provisions and whether one
trumps the other.
{¶ 77} Defendants cite Kunica, 233 B.R. 46, in support of their proposition that
Plaintiffs lack standing to sue in this matter, because the claims under the Ohio Uniform
Fraudulent Transfer Act remain with the trustee as part of the bankruptcy estate. In
Kunica, Sci-O-Tech filed a voluntary Chapter 11 bankruptcy petition. At that time,
Kunica, Ltd. owned 100% of the outstanding shares of common stock of Sci-O-Tech and
Richard Kunica was the President of both Kunica, Ltd. and Sci-O-Tech. In its plan for
reorganization, Sci-O-Tech expressly reserved the right to initiate litigation with respect
to any claim or cause of action maintainable by Sci-O-Tech. At the same time, Sci-O-
Tech issued a disclosure statement noting that litigation against third parties who
defaulted on commitments to lend or invest in it was quite likely to occur. Id. at 49-51.
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{¶ 78} Sci-O-Tech executed an agreement for the sale of substantially all its assets
to a company called Lumex. Certain claims or causes of actions against third parties
were not included in the sale of assets. The bankruptcy court approved the sale to
Lumex. Four months later, the bankruptcy trustee moved to dismiss Sci-O-Tech’s
bankruptcy case or convert it to one under Chapter 7 of the Bankruptcy Code. Sci-O-
Tech joined in the Trustee’s motion but requested that the bankruptcy court dismiss its
case rather than convert it to Chapter 7. The bankruptcy court dismissed Sci-O-Tech’s
case. A few months later, Sci-O-Tech assigned claims and causes of action to Richard
Kunica in consideration of $10 and “other good and valuable consideration.” Kunica then
sued two defendants pursuant to these assigned claims. Id. at 51-52.
{¶ 79} The defendants contended that Kunica lacked standing to assert Sci-O-
Tech’s claims, because Sci-O-Tech failed to disclose the existence and value of those
claims to its creditors and the bankruptcy court in its schedules or at any time during the
pendency of its Chapter 11 case. Id. at 52. The district court agreed with the
defendants. The court noted that “[a] basic tenet of bankruptcy law is that all assets of
the debtor, including all pre-petition causes of action belonging to the debtor, are assets
of the bankruptcy estate that must be scheduled for the benefit of creditors.” (Citations
omitted.) Id. According to the court, “[b]ecause undisclosed claims are not ‘dealt with’
by the plan, they do not revert to the debtor free of the claims of the creditors.” Id. The
court also noted that property that is scheduled pursuant to 11 U.S.C. Section 521(a)(1),
but not administered by the plan, is abandoned to the debtor by operation of law at the
close of the bankruptcy case. Id., citing 11 U.S.C. Section 554(c). “ ‘ By contrast,
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property that is not formally scheduled is not abandoned and therefore remains part of
the estate.’ ” Id., citing 11 U.S.C. Section 554(d) and other cases.
{¶ 80} The Kunica court reasoned that “[a] dismissal of a bankruptcy case,
however, as opposed to a discharge, should not provide a debtor with a safe harbor
against lack of standing to pursue causes of action that were not properly disclosed. * * *
[T]he key issue in this case is not dismissal nor discharge, but disclosure.” Id. at 53-54.
The court then concluded:
Given the critical importance of full and candid disclosure in Chapter
11 proceedings, it cannot be that the requirement of adequate disclosure
evaporates because a reversion of property is obtained by dismissal, under
§ 349, as opposed to abandonment under § 554. To hold otherwise would
be to encourage a procedural end-run around the disclosure requirements,
thereby rewarding parties that fail to comply with the directive of § 1125.
Thus, a bankruptcy discharge is not a prerequisite to a finding that a debtor
lacks standing to assert undisclosed claims post-bankruptcy.
Id. at 54-55.
{¶ 81} Based on this analysis, the Kunica court ruled that “[t]hese alleged
disclosures, both individually and in the aggregate are insufficient as a matter of law.
Accordingly, given Sci-O-Tech's failure to adequately disclose the existence and value of
the Claims, it does not have standing to assert them here. As an assignee of Sci-O-
Tech's Claims, Kunica has no greater rights or standing than would Sci-O-Tech.”
(Citation omitted.) Id. at 57.
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{¶ 82} Fifteen years later, in Crawford v. Franklin Credit Mgt. Corp., 758 F.3d 473(2d Cir.2014), the Second Circuit addressed the interplay between 11 U.S.C. Sections
349 and 554. The Second Circuit was reviewing the district court’s finding that plaintiffs
lacked standing, which was based on the Kunica decision. The Second Circuit rejected
the district court’s reliance on Kunica, holding:
We conclude that Crawford has standing to pursue her present
claims because her 2006 Petition was dismissed. Although the district
court stated that Crawford lacked standing because “unscheduled assets
can only re-vest in the debtor by the operation of law,” * * * we are
persuaded that, because Crawford's 2006 bankruptcy proceeding was
dismissed, all of Crawford's assets were indeed revested in her by operation
of law. Section 349 of the Code provides, with an exception not relevant
here, that unless the bankruptcy court for cause orders otherwise, “a
dismissal of a case ... revests the property of the estate in the entity in which
such property was vested immediately before the commencement of the
case,” 11 U.S.C. § 349(b)(3) * * * .
The district court viewed § 349 as overridden by § 554 of the Code,
titled “Abandonment of property of the estate.” * * *
We cannot view § 554(d) as overriding § 349. As noted above,
§ 541(a)(1) provides that the debtor's assets become property of the estate
“as of the commencement” of the bankruptcy case; this applies whether or
not the assets are listed in the required § 521(a)(1) schedule[.] * * * The
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provision in § 349 for the revesting of assets is similarly broad: It makes
no distinction between those that were listed in the debtor's schedule of
assets and those that were not; what is revested in the immediately pre-
petition owner or owners is “the property of the estate.” 11 U.S.C.
§ 349(b)(3). The legislative history makes clear that Congress intended
that a dismissal would undo the bankruptcy case[.] * * * Since the
dismissal undoes the bankruptcy case, there is, upon dismissal, no longer
any bankruptcy estate; and hence, there is no longer any property of the
estate. * * *
As there no longer remains any “property of the estate” after a case
has been dismissed, § 554 has no applicability after a dismissal. * * *
We are not persuaded to reach the opposite conclusion by the
opinion of the district court in Kunica, which dealt with a debtor that, despite
the dismissal, received relief that was tantamount to a discharge, and which
is, in any event, not binding on us. * * *
In sum, when Crawford's First Bankruptcy case was dismissed, the
property of the bankruptcy estate revested in her by operation of law. To
the extent that the district court declined to apply § 349 on the basis that the
equities did not favor Crawford, that rationale bespeaks estoppel rather than
lack of standing. We conclude that, by application of § 349, Crawford has
standing to pursue her present claims.
Id. at 484-485.
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{¶ 83} We agree with the Second Circuit that 11 U.S.C. Section 349 revests all the
property of the bankruptcy estate in its prior owners. When a trustee asks to be
discharged from further duties and the case is closed, the fraudulent transfer claims cease
to be property of the bankruptcy estate. William E. Weaner & Assocs., 2d Dist.
Montgomery No. 28399, 2020-Ohio-48, at ¶ 102. As such, Plaintiffs had standing to
bring claims pursuant to Ohio’s Uniform Fraudulent Transfer Act if they could establish
that they were net-losers under the Ponzi scheme and that the parties they were suing
were net-winners. Therefore, the trial court did not err in denying Defendants’ motion for
summary judgment on the standing issue.
{¶ 84} The second assignment of error is overruled.
III. The Doctrine of Mitigation of Damages Does Not Require Plaintiffs to Sue
Every Net-Winner
{¶ 85} Defendants’ third assignment of error states:
THE JURY VERDICTS WERE AGAINST THE MANIFEST WEIGHT
OF THE EVIDENCE ON THE AFFIRMATIVE DEFENSE OF MITIGATION
OF DAMAGES.
{¶ 86} In their final three assignments of error, Defendants challenge the judgment
as being against the manifest weight of the evidence. Appellants cite the appropriate
standard that courts of appeals must apply when reviewing manifest weight of the
evidence arguments. Appellants make no mention of the sufficiency of the evidence
standard and do not raise a sufficiency of the evidence argument in this assignment of
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error. But it is important for us to review these two concepts to determine what relief, if
any, Defendants are entitled to under this assignment of error.
{¶ 87} “The legal concepts of sufficiency of the evidence and weight of the
evidence are both quantitatively and qualitatively different.” State v. Thompkins, 78 Ohio
St.3d 380, 386, 678 N.E.2d 541 (1997). In Thompkins, the Ohio Supreme Court
described “sufficiency” as:
a term of art meaning that legal standard which is applied to determine
whether the case may go to the jury or whether the evidence is legally
sufficient to support the jury verdict as a matter of law.” * * * In essence,
sufficiency is a test of adequacy. Whether the evidence is legally sufficient
to sustain a verdict is a question of law.
Id. at 386, quoting Black's Law Dictionary 1433 (6th Ed.1990).
{¶ 88} “[E]ven if a trial court judgment is sustained by sufficient evidence, an
appellate court may nevertheless conclude that the judgment is against the manifest
weight of the evidence:
Weight of the evidence concerns “the inclination of the greater
amount of credible evidence, offered in a trial, to support one side of the
issue rather than the other. It indicates clearly to the jury that the party
having the burden of proof will be entitled to their verdict, if, on weighing the
evidence in their minds, they shall find the greater amount of credible
evidence sustains the issue which is to be established before them. Weight
is not a question of mathematics, but depends on its effect in inducing
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belief.”
(Emphasis sic.) Id. at 387, quoting Black's Law Dictionary 1594 (6th Ed.1990).
{¶ 89} Under the manifest weight of the evidence standard, an appellate court
must review the entire record, weigh the evidence and all reasonable inferences, consider
the credibility of witnesses, and determine whether, in resolving conflicts in the evidence,
the trier of fact clearly lost its way and created such a manifest miscarriage of justice that
the conviction must be reversed and a new trial ordered. State v. Otten, 33 Ohio App.3d
339, 340, 515 N.E.2d 1009 (9th Dist.1986), citing State v. Martin, 20 Ohio App.3d 172,
485 N.E.2d 717 (1st Dist.1983). An appellate court that overturns a jury verdict as
against the manifest weight of the evidence acts in effect as a “thirteenth juror,” setting
aside the resolution of testimony and evidence as found by the trier of fact. Thompkins
at 387. Notably, such a reversal is reserved for the exceptional case in which the
evidence presented weighs heavily in favor of the party against whom the jury verdict was
levied. Otten at 340.
{¶ 90} Although the standards enunciated in Thompkins were applied in a criminal
setting, the Ohio Supreme Court has made it clear that the sufficiency of the evidence
and the manifest weight standards also apply in the civil setting. “In a civil case, in which
the burden of persuasion is only by a preponderance of the evidence, rather than beyond
a reasonable doubt, evidence must still exist on each element (sufficiency) and the
evidence on each element must satisfy the burden of persuasion (weight).” Eastley v.
Volkman, 132 Ohio St.3d 328, 2012-Ohio-2179, 972 N.E.2d 517, ¶ 19.
{¶ 91} In addition to the differing standards used in the sufficiency and manifest
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weight analyses, another key distinction between the two involves how many appellate
court judges must agree to order the appropriate relief. To reverse a judgment based on
sufficiency of the evidence, only a majority of the appellate panel is required. However,
“[n]o judgment resulting from a trial by jury shall be reversed on the weight of the evidence
except by the concurrence of all three judges hearing the cause.” Ohio Constitution,
Article IV, Section 3(B)(3). Therefore, “unanimous panels are needed to reverse
judgments based on civil jury verdicts on grounds that they are against the manifest
weight of the evidence.” Eastley at ¶ 7, citing Bryan-Wollman v. Domonko, 115 Ohio
St.3d 291, 2007-Ohio-4918, 874 N.E.2d 1198.
{¶ 92} Another notable distinction between sufficiency and manifest weight
analyses involves what relief an appellate court may grant if it finds that a judgment is not
supported by sufficient evidence or is against the manifest weight of the evidence. This
is most easily understood in a criminal setting where the double jeopardy clause
precludes retrial if the reversal by the appellate court is based upon a finding that the
evidence was legally insufficient to support the conviction. Thompkins at 387, citing
Tibbs v. Florida, 457 U.S. 31, 47, 102 S.Ct. 2211, 72 L.Ed.2d 652 (1982). If the reversal
is based on a manifest weight analysis, however, the double jeopardy clause does not
preclude retrial of a defendant. In the civil setting, this has resulted in a similar
dichotomy. If at least two members of the appellate panel find that the judgment was not
supported by sufficient evidence, then the court may reverse the judgment and enter the
judgment that should have been entered. But if the appellate panel unanimously finds
that the judgment was against the manifest weight of the evidence, then the appellate
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court may not enter final judgment on the weight of the evidence but must instead remand
the case for a new trial. Hanna v. Wagner, 39 Ohio St.2d 64, 66, 313 N.E.2d 842 (1974);
Bown & Sons v. Honabarger, 171 Ohio St. 247, 251-252, 168 N.E.2d 880 (1960).
{¶ 93} In their final three assignments of error, Defendants contend that the
judgment was against the manifest weight of the evidence. No separate argument is
made that the judgment was not supported by sufficient evidence, and we will not rewrite
Defendants’ assignments of error to include such an argument. Therefore, if Defendants
establish that the judgment was against the manifest weight of the evidence, then we are
limited to reversing and remanding for a new trial rather than entering judgment for
Defendants.
{¶ 94} In their third assignment of error, Defendants challenge the judgment as
being against the manifest weight of the evidence on the affirmative defense of mitigation
of damages. As a general rule, “an injured party has a duty to mitigate and may not
recover for damages that could reasonably have been avoided.” Chicago Title Ins. Co.
v. Huntington Natl. Bank, 87 Ohio St.3d 270, 276, 719 N.E.2d 955 (1999), citing S & D
Mechanical Contrs., Inc. v. Enting Water Conditioning Sys., Inc., 71 Ohio App.3d 228,
593 N.E.2d 354 (2d Dist.1991). However, the obligation to mitigate is not unlimited; the
party is not expected to incur extraordinary expenses or to do what is unreasonable or
impracticable. Lucky Discount Lumber Co., v. Machine Tools of Am., 181 Ohio App.3d
64, 2009-Ohio-534, ¶ 12 (2d Dist.). In mitigating damages, an injured party must use
only ordinary and reasonable effort to avoid or lessen the damages. Abroms v. Synergy
Bldg. Sys., 2d Dist. Montgomery No. 23944, 2011-Ohio-2180, ¶ 58, citing Lucky Discount
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Lumber at ¶ 12. A defendant will not be held responsible for those damages that plaintiff
could have avoided with reasonable effort and without undue risk or expense. Kanistros
v. Holeman, 2d Dist. Montgomery No. 20528, 2005-Ohio-660, ¶ 36. The defendant
against whom the claim is made has the burden to demonstrate the injured plaintiff’s
failure to mitigate damages. Id. at ¶ 37.
{¶ 95} The trial court gave the following instruction to the jury on the mitigation of
damages issue:
The duty to mitigate is an affirmative defense. If the defendants
proved by a preponderance of the evidence that a plaintiff did not use
reasonable diligence or make reasonable efforts under the fact and
circumstance in evidence to avoid loss or lessen damages caused by
Apostelos’ fraud, you should not allow damages that could have been
avoided by the exercise of reasonable diligence or reasonable efforts to
avoid loss. The plaintiff, however, is not required to take measures that
would involve undue risks, burden or humiliation.
Charge to the Jury, p. 12-13. See also Trial Tr. 1152.
{¶ 96} Defendants contend that “[t]he record at trial was replete with evidence that
showed the Plaintiffs’ failure to mitigate their damages by choosing not to sue certain net
winners.” Appellants’ Brief, p. 19. According to Defendants, “[f]iling suit against 77 of
the 208 individuals who profited at the end of the Apostelos’ scheme is not a reasonable
mitigation. In fact, it isn’t mitigation at all.” Id. at 20. Further, Defendants believe the
Plaintiffs “had a duty to lessen not only their damages, but the ‘cost’ to the [Defendants].”
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Reply Brief, p. 11. Defendants note that “[Plaintiffs] left $2,568.147.51 on the table by
not pursuing all net-winners. Had the [Plaintiffs] attempted to collect from all net-winners,
it is clear that the [Defendants’] ‘cost’ would have been lessened as the [Plaintiffs] could
have recovered from additional parties.” Id. In sum, Defendants believe that Plaintiffs’
“choice to file suit against only select individuals was improper and a failure to mitigate
their damages.” Id. at 10.
{¶ 97} Plaintiffs respond that the failure to mitigate damages is an affirmative
defense, the burden of which lies with Defendants. Appellees’ Brief, p. 26. Plaintiffs
contend that “mitigation looks at whether a plaintiff could avoid damages in the first place,
not spread recovery of damages among more defendants.” Id. at 27. According to
Plaintiffs, “Ohio law provides mechanisms for spreading liability among responsible
defendants and if [Defendants] believed any such mechanism applied here they were free
to pursue it.” Id. at 28.
{¶ 98} Ultimately, Defendants take issue with Plaintiffs’ decision to pick and
choose which net-winners to sue rather than just suing all the net-winners. But typically,
it is a plaintiff’s choice who to sue and not to sue. Moreover, we are not convinced this
choice is relevant to the question of whether Plaintiffs took the reasonable, adequate
steps to mitigate their damages. Indeed, we fail to see how suing additional parties
would change the amount of damages Plaintiffs previously suffered because of the Ponzi
scheme or change the amount by which Defendants were net-winners under the Ponzi
scheme.
{¶ 99} We do not agree that Plaintiffs’ decision not to sue every net-winner
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established that Plaintiffs had failed to mitigate their damages. Although suing net-
winners is a way to collect damages, suing more net-winners would not reduce the
amount of damages that Plaintiffs suffered because of the fraudulent transactions. At
the same time, we acknowledge Defendants’ frustration that they were sued when many
other net-winners were not sued. Further, “[w]e are aware that it may create a significant
hardship when an innocent investor * * * is informed that he must disgorge profits he
earned innocently, often years after the money has been received and spent.
Nevertheless, courts have long held that [it] is more equitable to attempt to distribute all
recoverable assets among the defrauded investors who did not recover their initial
investments rather than to allow the losses to rest where they fell.” Donell v. Kowell, 533
F.3d 762, 776 (9th Cir.2008), citing Scholes v. Lehmann, 56 F.3d 750, 757 (7th Cir.1995).
Indeed, the use of Ohio’s Uniform Fraudulent Transfer Act may be the best available
means to attempt to “mitigate” the losses suffered by innocent net-losers. Kowell at 776.
{¶ 100} The third assignment of error is overruled.
IV. The Plaintiffs Were Required to Show that They Invested in Good Faith in Order
to Recover Monies from Net Winners
{¶ 101} Defendants’ fourth assignment of error states:
THE JURY VERDICTS IN FAVOR OF NINE PLAINTIFFS WERE
AGAINST THE MANIFEST WEIGHT OF THE EVIDENCE ON THE ISSUE
OF GOOD FAITH.
{¶ 102} Defendants note that the judgment against them was in favor of the
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following 12 Plaintiffs: (1) the Estate of Rafael M. Cruz; (2) Gloria Cruz; (3) Rafael F. Cruz,
Jr.; (4) Joe Mullane; (5) John Goodman; (6) the Estate of Steve Harvey; (7) Michael
Harvey; (8) Carolyn Hedderly f/k/a Harvey; (9) Kristin Harvey; (10) John Riccobono; (11)
Rebecca Riccobono; and (12) Andrew White. But out of these 12 Plaintiffs, only John
Goodman, Michael Harvey, and Rafael Cruz, Jr. testified at the trial. According to
Defendants, the nine Plaintiffs who did not testify at trial failed to establish that they had
invested with Apostelos in good faith, and therefore they could not recover any judgment
against Defendants.
{¶ 103} Plaintiffs counter that “[n]either the plain text of the statute nor the case
law requires a plaintiff/creditor must, as a condition precedent, prove his or her own good
faith to satisfy an [Ohio Uniform Fraudulent Transfer Act] claim.” Appellees’ Brief, p. 32.
According to Plaintiffs, “ ‘good faith’ arises only in the context of an affirmative defense
for a transferee.” Id. Further, Plaintiffs contend that the three Plaintiffs who testified at
trial provided sufficient testimony to support a finding of good faith on the part of the nine
Plaintiffs who did not testify at trial. Id. at 29.
{¶ 104} In its December 10, 2021 Decision, the trial court found that Plaintiffs had
the burden of proof to show good faith as a condition precedent to recovery of restitution
damages as alleged net-losers. Further, at trial, the jury was presented with the following
instruction regarding Plaintiffs’ duty to show good faith:
Each Plaintiff must also set forth prima facie evidence he or she
invested with Apostelos in good faith. * * *
While there is no precise definition of “good faith,” its existence
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depends on whether the person receiving the transfers had information to
put them on inquiry notice that the transferor may have had a fraudulent
purpose. Whether a person is on inquiry notice of another’s fraudulent
intent depends on the standards, norms, practices, sophistication, and
experience generally possessed by participants in that person’s industry or
class. A person acts in good faith if the weight of the evidence does not
show the person knew or should have known of the fraudulent nature of
another’s activities.
If you decide any Plaintiff knew or should have known that Apostelos
had fraudulent intent, or that the circumstances were such that would place
a reasonable person on inquiry of Apostelos’ fraudulent purposes such that
had a diligent inquiry been performed the inquiry would have uncovered
Apostelos’ fraudulent purpose, then the Plaintiff cannot have taken the
transfers in good faith.
Charge to the Jury, p. 7, 10.
{¶ 105} The good faith requirement at issue comes from the language contained
in Ohio’s Uniform Fraudulent Transfer Act. R.C. 1336.08(A) provides that: “A transfer or
an obligation is not fraudulent under division (A)(1) of section 1336.04 of the Revised
Code against a person who took in good faith and for a reasonably equivalent value or
against any subsequent transferee or obligee.” Further, the statute provides that
judgment may be entered against either: “(a) The first transferee of the asset or the person
for whose benefit the transfer was made; (b) Any subsequent transferee other than a
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good faith transferee who took for value or from a subsequent transferee.” R.C.
1336.01(B)(1).
{¶ 106} Typically, good faith is raised as a defense by a defendant in a Ponzi
scheme case involving fraudulent transfer claims to show that he should at least receive
credit for the amount he invested in the scheme against any amounts he received from
the scheme. But we agree with the trial court that before Plaintiffs could recover money
from Defendants, they also had to put forth evidence that they had invested with
Apostelos in good faith. Otherwise, Plaintiffs could recover money even if Plaintiffs were
aware that they were participating in a Ponzi scheme at the time they gave money to and
received money from Apostelos. The same rationale for applying the good faith standard
to defendants in fraudulent transfer act cases equally applies to plaintiffs seeking to
recover monies in such cases. “Only innocent investors who reasonably believed that
they were investing in a legitimate enterprise are entitled to claims for restitution.” In re
Bernard L. Madoff Invest. Secs. LLC, 445 B.R. 206, 225 (Bankr.S.D.N.Y. 2011). “Since
investors in a Ponzi scheme are entitled to only an equitable right of repayment, there
can be no legally enforceable debt if the investors acted in bad faith. Therefore, while
innocent investors are entitled to restitution claims up to the amount of their principal,
such is not the case when investors * * * are alleged to have had knowledge of, and
played a part in, furthering the fraud.” Id. at 226.
{¶ 107} As the Ninth Circuit explained in Kowell, 533 F.3d 762:
Under the actual fraud theory, the good faith losing investor is
technically still liable even if his net transactions are negative, because even
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payments that total less than the amount of that investor’s initial outlay were
made “[w]ith actual intent to hinder, delay or defraud [a] creditor of the
debtor.” * * * However, because of the “good faith” defense, that permits an
innocent investor to retain funds up to the amount of the initial outlay, * * *
the good faith investor with a net loss will not face any actual liability.
Id. at 771, fn. 4, citing California’s version of the Uniform Fraudulent Transfer Act.
{¶ 108} Having established that the trial court did not err in requiring each Plaintiff
to show that he or she had invested in good faith before he or she could recover a
judgment against Defendants, the question becomes whether each Plaintiff did establish
such good faith.
{¶ 109} “Good faith is essentially a weight of the evidence question.” E. Savings
Bank v. Bucci, 7th Dist. Mahoning No. 08 MA 28, 2008-Ohio-6363, ¶ 85. “The
determination of a lack of good faith does not rely solely on actual intent but can involve
an inquiry into the party's motive and purpose.” Id., citing Castle Properties v. Lowe's
Home Centers, Inc., 7th Dist. Mahoning No. 98 CA 185, 2000 WL 309395, *6 (March 20,
2000). “Although good faith generally denotes honesty of purpose and freedom from
intention to defraud, the [factfinder] can consider evidence of what is reasonable in order
to evaluate good faith and can evaluate any objective facts that contradict the suggestion
of a subjectively honest purpose.” Id.{¶ 110} During the jury trial, Plaintiffs John Goodman, Rafael F. Cruz, and Mike
Harvey testified regarding the issue of good faith. They provided sufficient testimony, if
credited, for the jury to have made a finding that the three of them invested with Apostelos
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in good faith.
{¶ 111} None of the other nine Plaintiffs, however, testified at trial. But the failure
to testify did not necessarily preclude a finding of good faith if there was other evidence
in the record upon which a reasonable jury could have relied to make a finding that the
other nine Plaintiffs had invested in good faith. Rafael F. Cruz testified that he believed
all those who invested with Apostelos invested in good faith. Such a blanket statement,
without more, was not sufficient to establish good faith on the part of the nine Plaintiffs
who did not testify, especially when Rafael did not give a factual basis for this belief. In
other words, he needed to testify at least to his interactions with the other Plaintiffs that
would lead him to believe that these Plaintiffs invested in good faith.
{¶ 112} Rafael testified that he introduced Apostelos to his family. According to
Rafael, his father and his sister, Gloria Cruz, along with her husband, Joseph Mullane, all
invested with Apostelos based on Rafael’s recommendation. But no evidence was
presented regarding what any of these parties had known about Apostelos, what
information they had obtained during their interactions with Apostelos, or whether their
decision to invest had been based solely on Rafael’s recommendation. On the other
hand, Rafael explained that there had been a tax problem that he, his father, and his
sister knew about involving their father and Apostelos. Although Rafael testified that he,
at the time, had not suspected any wrongdoing by Apostelos, there was no similar
evidence in the record that his father and his sister had not suspected any wrongdoing.
Further, Plaintiffs’ expert, Soneed Kapila, testified that a 50% interest rate in a promissory
note should be a red flag for an investor and that one of Gloria Cruz’s promissory notes
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with Apostelos included a 50% rate of interest. Given this evidence that may have put
an investor on notice of potential wrongdoing, it was incumbent on Plaintiffs to submit
evidence establishing that the nine non-testifying Plaintiffs had invested with Apostelos in
good faith.
{¶ 113} Mike Harvey testified that he and Kristen Harvey met with Apostelos
together and their meeting with Apostelos and an attorney had inspired confidence in
Apostelos. Harvey testified that he had invested with Apostelos in good faith. When he
found out that Apostelos’ office had chains on its doors, Harvey immediately began crying
and was devasted and he then told his wife. Harvey did note that their stockbroker may
have warned his wife about rolling over an IRA, but Harvey testified that he did not suspect
any wrongdoing from Apostelos until October 2014. Although Harvey presented
testimony on which a jury could have found that he had acted in good faith, he did not
provide evidence on which a jury could have found that his ex-wife or other family member
invested in good faith. It was important to determine what facts each of the other family
members had known, what interactions they had had with Apostelos, and whether they
should have been on notice based on the information they knew or should have known.
Similarly, the record lacks any basis on which a reasonable jury could have found that
Plaintiffs John Riccobono, Rebecca Riccobono, and Andrew White had invested in good
faith.
{¶ 114} We acknowledge that Ponzi schemes that last several years typically do
so because the operators of the scheme were very skilled at deception. And it is
tempting to assume that every investor was completely fooled to the point that they
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invested in good faith. But there was evidence in the record that different investors had
different interactions with Apostelos and had different information available to them that
might have put an average investor on notice of potential wrongdoing. While it seems
inconceivable that anyone would invest with someone with knowledge that they were
dealing in a Ponzi scheme or a fraudulent transaction, the reality is that sometimes that
does happen or, at least sometimes, investors gain enough information that should have
put them on inquiry notice that they may have been involved in a fraudulent transaction.
Therefore, it was important that the investors present some evidence that they had
invested in good faith. Just as Defendants needed to show good faith, Plaintiffs did as
well. The nine non-testifying Plaintiffs failed to do so. Therefore, to the extent that the
judgment was in their favor, it was against the manifest weight of the evidence and must
be vacated.
{¶ 115} Plaintiffs argue that this assignment of error should be overruled even if
we were to conclude that the judgment for the nine non-testifying Plaintiffs was against
the manifest weight of the evidence. According to Plaintiffs, the total amount of the
judgment in favor of Plaintiffs Rafael Cruz, Jr., John Goodman, and Mike Harvey was still
well above the amount by which Defendants were net-winners. Plaintiffs believe
Defendants did not suffer any prejudice through this portion of the judgment, and
therefore the assignment of error should be overruled. We do not agree. Apparently,
Plaintiffs were to share the recoveries in this lawsuit pro-rata. Therefore, whether there
were three winning Plaintiffs versus twelve winning Plaintiffs made a difference in the pro-
rata share of each. Further, allowing nine Plaintiffs who did not show good faith to share
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in the recovered winnings would be contrary to the law of restitution applied in Ponzi
scheme and fraudulent transfer act cases. Just as Defendants had to show good faith
to have their investments credited against the transfers received from Apostelos, Plaintiffs
had to show good faith to get credit for their amounts invested. By not doing so, they
could not establish a viable claim under the Ohio Uniform Fraudulent Transfer Act.
{¶ 116} Due to their failure to put forth evidence of good faith, the judgment will be
reversed as against the manifest weight of the evidence to the extent that it found in favor
of the following Plaintiffs: (1) the Estate of Rafael M. Cruz; (2) Gloria Cruz; (3) Joe
Mullane; (4) the Estate of Steve Harvey; (5) Carolyn Hedderly f/k/a Harvey; (6) Kristin
Harvey; (7) John Riccobono; (8) Rebecca Riccobono; and (9) Andrew White.
{¶ 117} The fourth assignment of error is sustained.
V. The Jury’s Decision to Not Credit Chad Leopard with a $25,000 Cash
Investment Wad Not Against the Manifest Weight of the Evidence
{¶ 118} Appellants’ fifth assignment of error states:
THE JURY VERDICT AGAINST CHAD LEOPARD WAS AGAINST
THE MANIFEST WEIGHT OF THE EVIDENCE.
{¶ 119} The jury returned a verdict in favor of Plaintiffs against Defendant Chad
Leopard in the amount of $192,050. Chad contends that the jury impermissibly relied
solely on the summary included in Kapila’s expert report, which did not credit any cash
payments by investors. Appellants’ Brief, p. 24. According to Chad, no evidence was
offered by Plaintiffs that he did not make a cash investment. On the other hand, Chad
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testified at trial that he had made a $58,500 initial cash investment, and this testimony
was supported by a ledger that Apostelos possessed. Id. at 23. Chad concedes that
he testified on cross-examination at trial that he had previously testified at a deposition
that his initial cash investment was $25,000. Id. But Chad points out that he testified
that his first investment with Apostelos was in July 2013 when he physically met with
Apostelos along with Joe Leopard. According to Chad, “[t]hat timeline corresponds
directly with the timeline for Joe, who the parties stipulated invested in cash on July 1,
2013, on the recommendation of Chad.” Reply Brief, p. 15, citing Stipulation #9.
{¶ 120} Further, Chad states that his Exhibit A at trial further evidenced financial
transactions between he and Apostelos in July 2013 and that these documents were
undisputed evidence. Id. Chad argues that, “[i]mportantly, at the trial, counsel for
Plaintiffs did not object to the fact that Chad deposited at least some cash with Apostelos.
The dispute at trial was over the amount.” Id. at 24. He concludes that “[w]hether the
jury found Chad credible or not, they should have never found that he failed to invest any
cash with Apostelos.” Id. at 15.
{¶ 121} Plaintiffs respond that the jury was free to disbelieve all or part of Chad’s
testimony. According to Plaintiffs, “[t]he parties did not dispute Chad invested $53,000
as supported by documentary evidence,” but it “was Chad’s burden to prove his cash
investments” and “he offered only self-serving and contradictory testimony in support.”
Appellees’ Brief, p. 34.
{¶ 122} Chad testified both in his deposition and at trial that he had made a cash
investment during his first meeting with Apostelos. As Chad explained at trial, he had
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previously testified at his deposition that he had invested $25,000 in cash with Apostelos
at their first meeting. At the time of trial, however, Chad believed that he had invested
$58,500 in cash with Apostelos at their first meeting. This change in testimony did not
appear to be the result of an improved memory or an epiphany, but instead appeared to
be the result of documentation kept by Apostelos that reflected an initial cash investment
of $58,500. Although it is understandable that Chad might not have remembered the
exact amount of money he had invested several years earlier, there was a substantial
difference between $25,000 and $58,500. Further, the jury was free to believe or
disbelieve Chad’s testimony. While the documentation kept by Apostelos supported at
least some initial cash investment made by Chad, this documentation was created by an
operator of a Ponzi scheme. Assuming the jury discredited that unauthenticated
documentation, only Chad’s changing testimony remained. Given the record before us,
we cannot conclude that the jury’s decision to not credit Chad with any initial cash
investment was against the manifest weight of the evidence.
{¶ 123} The fifth assignment of error is overruled.
VI. Conclusion
{¶ 124} The judgment will be reversed to the extent that it entered judgment in
favor of Plaintiffs the Estate of Rafael M. Cruz, Sr., Gloria Cruz, Joseph Mullane, Carolyn
Hedderly f.k.a. Harvey, Kristen Harvey, the Estate of Steve Harvey, John Riccobono,
Rebecca Riccobono, and Andrew White against Defendants-Appellants Chad Leopard,
Joe Leopard, and Joe’s Landscaping of Beavercreek, Inc., and the matter will be
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remanded for further proceedings with respect to those Plaintiffs. In all other respects,
the judgment of the trial court will be affirmed.
.............
TUCKER, P. J. and WELBAUM, J., concur.