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Investors take default judgment against Ponzi schemers: not allowed to pursue claim against alleged enablers

Several groups of investors sued the operators of a Ponzi scheme, as well as the "advisers" who entangled them in the scheme.  According to the U.S. Government, Michael E. Kelly sold interests in timeshare apartments at Mexican resort hotels and used the proceeds to pay "dividends" to prior "investors."  Ultimately it was alleged that he stole about $400 million dollars.  Some of the investors sued Kelly and other defendants who promoted and marketed the Ponzi scheme for Kelly, or who advised the Plaintiffs to invest, including Ruttenberg Financial Marketing, and Mitchell Valeri & Associates (MVA).  It was alleged that the "advisers" from MVA acted as agents for a number of insurance companies that held annuities which were liquidated to enable the investments, including Golden Rule, ING USA Annuity and others.

The investors obtained a default against Kelly, some as a result of discovery sanctions and others as a result of a default judgment in a separate action, leaving him a "participant" only in the damage phase of the trial.  At trial, the plaintiff's attorneys obtained a default against Ruttenberg for failing to appear, as well.  They also asked the court to enter a judgment in an amount equal to the entirety of their losses against the defaulted defendants, and the court obliged.

The remaining defendants then cited the "tort reform" court rules requiring allocation of damages among defendants and demanded that they be dismissed, since the plaintiffs had now achieved a "judgment" against some defendants for 100% of their damages.  The Court agreed and dismissed the remaining defendants. Adding insult to injury, those defendants now dismissed on this technicality sought case evaluation sanctions from the plaintiffs, since the plaintiffs secured no recovery from them and did not "improve" upon the case evaluation against them. The trial judge denied this request for a variety of reasons.  Both sides appealed.

The Court of Appeals this week rejected the argument that after the default judgments were entered, the trial court should have made findings of fact that allocated the fault among all defendants.  It held, as had the trial court, that by securing judgments for their total damages (however uncollectible) against the non-compliant defendants, the plaintiffs had squandered their right to continue to pursue claims against the remaining defendants.  it also rejected the claims by the benefitting defendants that they should recover sanctions; it pointed out that under the case evaluation rule, since the plaintiffs had secured an overall judgment that was better than the case evaluation, they owed sanctions to no one of the defendants.

Thompson O’Neil, P.C.
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Traverse City, Michigan 49684
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