Ponzi victims can’t pierce corporate veil to collect on judgments

Victims of a Ponzi scheme who brought their first action to recover their lost investments in 2006 have been dealt a blow with a decision by the 8th U.S. Circuit Court of Appeals that prevents them from reaching the assets of those at fault.

The 8th Circuit held that the district court properly granted summary judgment to Nathan Reuter, the alleged scheme mastermind, and his wife on the victims’ claims seeking to pierce the corporate veil to reach assets that once belonged to the couple.

The victims were defrauded by a Ponzi scheme run by Nathan Reuter and several associates known as Vertical Group, LLC. They sued Reuter and Vertical, and the district court entered an order of default but no damages when Vertical failed to defend the action. Reuter sought bankruptcy protection, and the bankruptcy court awarded the victims actual and punitive damages.

The district court reopened the victims’ original case and entered a final judgment with damages. The defendants were unable to satisfy the judgments, so the victims targeted assets formerly belonging to Nathan Reuter and Kathleen Reuter, his wife, as tenants by the entirety.

The Reuters then transferred their assets to a revocable trust. Kathleen Reuter revoked the trust and transferred the assets to her possession, so the victims sought to levy on the assets held by her exclusively by arguing that Vertical was a sham company.

The victims claimed that the sham company covered an underlying partnership with the Reuters as tenants by the entirety. They sought to pierce the corporate veil to reach the partnership. They also argued that Nathan Reuter fraudulently transferred his part of the trust to his wife.

The 8th Circuit pointed out that the veil-piercing claim depended on establishing that Nathan Reuter’s share of the partnership belonged to the Reuters as a couple and not to him alone. The court found that the tenancy-by-the-entirety claim failed without a showing of intent.

“While Missouri has recognized a partnership interest held by two spouses as tenants by the entirety, it has done so only when there has been evidence of both spouses’ clear intent to hold the partnership as a married couple,” Judge Raymond W. Gruender wrote.

The 8th Circuit disagreed that a statement by Nathan Reuter about the couple’s hopes to profit showed such intent. The victims also did not provide evidence of a written or oral partnership statement.

“As a result, on the record before us, no reasonable jury could conclude that there was ‘clear, cogent and convincing’ evidence that the Reuters participated in the Tortfeasor Partnership as a married couple. Therefore, the district court did not err in granting summary judgment to the Reuters on the Creditors’ claims seeking to pierce the corporate veil and reach the assets that once belonged to the Reuters as a married couple,” the 8th Circuit said.

“My client was in the unique position of addressing claims when there was no judgment against her,” said Thomas M. Harrison, the Columbia attorney who represented Kathleen Reuter. “It certainly pleases my client that the court saw through these arguments.”

The 8th Circuit also disagreed with the argument that Nathan Reuter fraudulently transferred his interest to Kathleen Reuter, explaining that he was not a settlor of the trust.

Judge Steven M. Colloton issued a separate opinion concurring in the judgment. He noted the victims’ two-step argument that first the court should pierce the veil to reach the assets of the partnership and then the court should find that the Reuters owned Nathan’s share of the partnership as tenants by the entirety, so that Kathleen was also liable for the partnership debts.

Colloton said the argument failed at step one.

“The court here concludes as a matter of law that Nathan alone owned the partnership interest, because there is not ‘clear, cogent, and convincing evidence’ that Nathan and Kathleen owned the interest as tenants by the entirety. This is a debatable application of Missouri law that we should be reluctant to adopt. Missouri courts require clear and convincing evidence to show that a partnership has been ‘established,’” he wrote.

“If there is not clear and convincing evidence that either Nathan or the Reuter entirety owned the partnership interest, but only a preponderance of the evidence pointing to one or the other, then we would be left with a partnership interest that has no owner. It seems more likely that Missouri would apply the traditional preponderance standard to resolve this dispute. Under that standard, in view of the weak presumption applicable to entirety funds and Nathan’s testimony…there is a genuine dispute of material fact about whether the partnership interest is owned by Nathan or the Reuter entirety,” Colloton explained.

He concluded that the victims did not establish grounds to pierce the veil, and he agreed that there was no showing that Nathan Reuter fraudulently transferred his interest.

David Gregory Brown, a Columbia attorney, argued for the appellants. Harrison and James F.B. Daniels, of Kansas City, Missouri, argued for the appellees. Brown and Daniels could not be reached for comment.

The case is Cutcliff v. Reuter, 17-1465. MO