The originator of the contentious clawbacks in the Vaughan Company Realtors bankruptcy case is fighting a legal maneuver to oust her from her court-appointed post.
The motion to convert the long-gone company’s case from a Chapter 11 business reorganization to a Chapter 7 liquidation, filed on behalf of retired Albuquerque lawyer Julius Wollen, would effectively lead to the removal of Judith Wagner as trustee in charge of the company’s bankruptcy estate.
“It is reasonable to assume that the motion is a litigation tactic designed to avoid reaching the merits of the complaint filed by the trustee against Wollen,” says a document filed by the U.S. Trustee’s Office, a regulatory and enforcement agency that administers and provides oversight of the bankruptcy process.
Court-appointed trustees in charge of bankruptcy estates and the U.S. Trustee’s Office serve separate and distinct roles in the bankruptcy process, despite the common use of the term “trustee.”
Wollen is one of about 200 defendants – the vast majority of whom were investors in disgraced former real estate executive Doug Vaughan’s Ponzi scheme – in 161 clawback “complaints,” or civil lawsuits, filed between April 2010 and February 2012.
Another defendant, Albuquerque auto dealer Bob L. Turner, recently settled a clawback complaint with Wagner. Described in a court document as “a long-time friend of Vaughan,” Turner was likely the biggest investor in Vaughan’s scheme.
Clawbacks seek to recover or claw back so-called “fraudulent transfers” as well as preferential payments of money in bankruptcy cases. In cases involving Ponzi schemes, clawbacks take on a controversial aspect because the targets are typically crime victims.
Vaughan, who was majority owner of Vaughan Company Realtors, was sentenced in September to 12 years in federal prison for running a Ponzi scheme that scammed $75 million from upwards of 600 victims, most of them from New Mexico.
Ponzi schemes are investment swindles in which money put up by later investors is used to pay fake profits to earlier ones. Investors with Vaughan thought their money was being used for real estate deals.
The scandal broke in February 2010 after Vaughan and his flagship real estate company filed parallel Chapter 11 petitions for bankruptcy court protection. Vaughan’s personal bankruptcy case was converted to a Chapter 7 liquidation in May 2010 while the company’s case has remained in Chapter 11.
Wollen was allegedly an early investor, first putting $145,000 into Vaughan’s promissory notes at 15 percent interest in 1993, according to the clawback complaint filed against him. Over the years, Wollen allegedly invested a total of $960,225, most of it at 20 percent interest, the complaint says.
Wollen allegedly profited from the Ponzi scheme, receiving $1,389,290 in payments from Vaughan, the complaint says. If the allegation is true, then Wollen would be what is typically called a “net gainer” in the Ponzi scheme.
The complaint also alleges that Wollen once practiced law with Sylvain Segal, whom Vaughan personally credited with giving him the idea of issuing promissory notes in return for investor money. A form of investment security, the notes were the vehicle through which Vaughan ran his Ponzi scheme.
In February, Segal reached a $525,000 insurance settlement over a clawback.
In a separate action, Turner, once known for his “No Bull” slogan in TV commercials for his dealership, has paid $200,908 to settle a clawback that originally sought a maximum of upwards of $4.8 million.
Turner denies the allegations in the clawback.
The clawback lawsuit says, from 1996 to 2010, he invested a total of $7.7 million at interest rates that generally ranged from 20 percent to 22 percent. The settlement amount was for a preferential transfer, or a payment made within 90 days of the date of the bankruptcy filing.
Turner’s involvement in Vaughan’s scheme had a couple odd twists.
The clawback alleges that Vaughan stopped making interest payments to Turner in mid-2009 as his scheme collapsed. At that stage, Vaughan was unable to lure enough money from new investors to cover all of his financial obligations to older investors.
Despite being cut off by Vaughan, the clawback alleges Turner “subsequently invested another $2,750,000 into VCR’s note program.” Turner would have lost most if not all of that late-term investment.
Then in early February 2010, roughly three weeks before the parallel bankruptcies, Turner made out a check for $200,000 to a Baltimore law firm to defend Vaughan against a Securities and Exchange Commission investigation. In a signed court affidavit, Turner said the $200,000 was a gift.
Two months later in April 2010, Turner did an about-face. He claimed in a Bankruptcy Court filing that he had no memory of signing the check and accused Vaughan of “intentional misrepresentation” in getting it.
The $200,000 check became the focal point of yet another court battle. The amount of Turner’s clawback settlement stems in part from activities related to the original $200,000 check.