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Chao v. USA Mining Inc.

January 24, 2007


The opinion of the court was delivered by: Chief Judge Curtis L. Collier


Defendant Dan Geiger ("Geiger") filed a motion to dismiss the consolidated civil actions brought by Plaintiffs Elaine Chao, Secretary of Labor ("Chao"), and the Pension Benefit Guaranty Corporation ("PBGC") (Court File No. 63).*fn1 Chao and PBGC filed a joint response (Court File No. 64). Geiger filed a reply (Court File No. 83).

Plaintiffs Chao and PBCG (collectively "Plaintiffs") filed a motion for summary judgment against Defendants Dan Geiger, USA Mining, Inc., USA Bullion, Inc. (collectively "Defendants") and Bugsy Malone's Speakeasy, LLC ("Bugsy's") (Court File No. 129). Geiger filed a response to Plaintiffs' motion for summary judgment (Court File No. 144). Plaintiffs filed a reply (Court File No. 147).

For the following reasons, the Court will DENY Geiger's motion to dismiss (Court File No. 63) and will GRANT IN PART and DENY IN PART Plaintiffs' motion for summary judgment (Court File No. 129).The Court will RESERVE ruling on damages pending the submission of a revised damage calculation.


A. The Alleged Fiduciaries and Parties in Interest

SCT Yarns, Inc. ("SCT") was a Delaware corporation with operations located in Chattanooga, Tennessee and Washington, Georgia (Court File Nos. 1, 12). The SCT Yarns, Inc. Retirement Plan for Hourly Employees and the SCT Yarns, Inc. Retirement Plan for Salaried Employees ("the Plans") were employee benefit plans governed by the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. §§ 1001-1461 (Court File No. 131, ex. A). SCT sponsored the Plans and served as the administrator of the Plans (Court File Nos. 1, 12). At all relevant times, Kenneth H. Combs, Jr. ("Combs") was the Plans' trustee and the Chief Executive Officer, Director and majority owner of SCT (id.).

USA Mining, Inc. ("USAM") was incorporated in the State of Nevada on July 9, 1996 (id.). Defendant Geiger was the Chief Executive Officer and majority owner of USAM (id.). USAM's stock was neither a publicly offered security nor a security issued by an investment company registered under the Investment Company Act of 1940, 15 U.S.C. §§ 80(a)(1)-(a)(64) (id.). USAM was a court appointed receiver of a mining project consisting of approximately five hundred twenty-five claims located in California (Court File No. 12). USAM intended to develop the land, clean up the title, and sell the land (Court File No. 131, ex. B). USAM had permits to explore and recycle on the land but did not have the permits required to mine (id.). USAM did not produce a product or service (id.).

USA Bullion Resources, Inc. ("USAB") was incorporated in the State of Nevada on January 2, 2000 (Court File Nos. 1, 12). USAM became a wholly-owned subsidiary of USAB on January 7, 2000 (id.). The Plans' USAM holdings were exchanged for USAB stock (id.). USAB's purpose was to act as a holding company for USAM and to protect Geiger and the Plans from liability (Court File No. 133, ex. B). USAB's shares were not offered or registered for public sale, and USAB was not an investment company registered under the Investment Company Act of 1940 (id.). At all relevant times, Geiger was the Chief Executive Officer and majority shareholder of USAB (Court File Nos. 1, 12). Combs was the Chairman of the Board of Directors of USAB (Court File No. 131, ex. B).

On October, 11, 1999, Bugsy's was incorporated in Nevada (Court File Nos. 1, 12). Bugsy's was described as a 624-room, $150,000,000 hotel and casino project with a Roaring Twenties theme that would cater to dot-com millionaires (id.). Geiger was Bugsy's majority shareholder (id.).

Tri-States Machinery Leasing, Inc. ("Tri-States") was a Tennessee corporation wholly-owned by Combs (id.). Combs was the president and director of Tri-States (id.). USAB entered into an independent contractor agreement with "Tri-States Leasing (Ken Combs)" where USAB agreed to pay Combs $25,000 per month (Court File No. 133, ex. X).

B. Plan Money to USAM and USAB

On September 24, 1999, USAM borrowed $3,500,000 from the Plans (Court File Nos. 1, 12). The loan was secured by an assignment of the deed of trust of USAM's mining claims (Court File No. 132, ex. G). The promissory note provided that USAM would repay the Plans $4,500,000 by March 21, 2000 (id.). The loan's interest rate was 18 percent per annum with $315,000 to be prepaid (id.). Geiger personally guaranteed the loans (id.). Geiger did not provide any documents to the Plans reflecting his financial ability to guarantee the loan of $3,500,000 (id.). USAM used the Plans' funds to disburse $910,000 to Geiger for an officer loan, $33,530.80 to Air-O-Sea Cargo and $52,681.07 to the IRS for taxes owed by Geiger (id.).

On December 3, 1999, the Plans' loan to USAM was converted to a twenty-five percent equity stock holding in USAM (id.). Simultaneously, Combs committed the Plans to contribute an additional $2,700,000 to fund all future capital needs of USAM (id.). As part of the equity conversion, Combs became Chairman of the Board of Directors of USAM (id.). On December 14, 2003, USAM received $730,000 from the Plans. The money was used to fund USAM's payroll and to pay other obligations (id.).

On January 18, 2000, USAM received $1,965,668 from the Plans (id.). USAM transferred $200,000 to its payroll account and $1,000,000 to USAB (id.). As a result of the transfer, the Plans' equity ownership in USAB increased to forty percent (id.). On April 7, 2000, USAB received $500,000 that the Plans had previously invested in the Royalton-Protected Fund, Ltd. ("Royalton") (Court File No. 141. exs. NN, PP). USAB received a loan of $400,000 and wired the remaining $100,000 to the Plans (court File No. 141, ex. NN). USAB used the funds to pay $200,000 to Tri-States to repay a promissory note (Court File No. 141, ex. NN). On September 29, 2000, $75,000 of the Plans' assets was used to pay USAM's debt at Premier Aviation (Court File No. 144, exs. PP, QQ). Furthermore, in September 2000 USAM received an additional $72,500 from the Plans (id.). C. Relationship to Bugsy's and Tri-States

On February 11, 2000, the Plans and Bugsy's entered into an equity funding agreement where the Plans agreed to fund up to thirty percent of the cost associated with the purchase and development of two parcels of land in Reno for a planned hotel and casino (id.). Additionally, USAM, USAB and Tri-States collectively transferred or lent Bugsy's more than $1,000,000 after becoming the Plans' fiduciaries (id.). According to an independent accountant's report issued on March 31, 2001, Bugsy's owed USAM $992,404 on a promissory note (Court File No. 139, ex. FF).

On January 14, 2000, USAM paid $25,000 to Tri-States (Court File nos. 1, 12). Between January 14 and May 30, 2000, USAM paid Tri-States an additional $87,500 (id.). On February 8, 2000, USAB wired Tri-States $200,000 (id.). On May 5, 2000, Tri-States wrote a check in the amount of $50,000 to Bugsy's (id.).

D. Defendants' Use of the Plans' Assets to Pay Debts

On November 9, 2000, Tim Manson and Patterson Corey, associates of Combs, executed a promissory note lending $30,000 to USA Mining and Ken Combs (Court File No. 141, ex. RR). The promissory note provided for repayment of $60,000 on or before November 20, 2002 (id.). The promissory note was paid by Tri-States (Court File No. 141, exs. SS, TT). On December 1, 2000, a second promissory note was issued where USAM and Combs borrowed $105,000 from Patterson Corey (Court File No. 141, ex. VV). The promissory note provided Patterson Corey would be paid $126,000 by December 11, 2000 (id.). Patterson was paid $130,000 with the Plans' funds on January 4, 2001 (Court File No. 141, ex. WW).

E. USAB Stock Purchase Agreement and Reverse Merger

On March 17, 2000, USAB and the Plans entered into a stock purchase agreement (Court File Nos. 1, 12). The agreement provided that upon the sale of USAM, the Plans would relinquish their forty percent ownership interest in USAB for $10,200,000 (id.). As part of the stock purchase agreement, Combs pledged the Plans' assets to USAM's creditors (Court File No. 131, ex. B). The Plans' assets secured a loan from Equity Capital Group, Inc. in the amount of $600,000. (Court File No. 139, ex. LL). When USAM defaulted, Equity Capital Group, Inc. filed suit against the Plans (id.). The Plans were forced to liquidate assets to satisfy the secured loan (Court File No. 139, ex. KK).

On September 15, 2000, the stock purchase agreement was amended and the Plans exchanged the USAB shares for a straight note in the amount of $10,200,000 due December 31, 2000 (Court File No. 31, ex. B). No security was given for the note (id.).

USAB merged into USAM under a reverse merger effective December 31, 2000 (Court File Nos. 1, 12). On April 1, 2001, Geiger and Combs executed a fixed rate promissory note between the Plans, USAB and USAM for $7,200,000 at nine percent interest per annum, payable by December 31, 2002 (id.). USAB and USAM are in default on the April 1, 2001 note and have only paid $65,000 on the note (id., Court File No. 131, ex. B).

F. Plans' Terminations

The Plans terminated when PBGC became the statutory trustee under 29 U.S.C. § 1342(c) on May 11, 2001 (Court File No. 141, exs. XX, YY). David Barton, financial analyst with PBGC, calculated the liability of USAM, USAB and Geiger to be $10,286,614.47 (Court File No. 141, ex. ZZ). Bugsy's liability is calculated to be $191,766.21 (id.).


On January 1, 2000, Chao brought suit against Defendants and Bugsy's seeking damages for violations of ERISA(Court File No. 1). PBGC initiated a civil action against Defendants and Bugsy's on May 10, 2004 (1-04-cv-138, Court File No. 1). This Court consolidated the two cases and designated Case No. 1-04-CV-1 as the lead case (Court File No. 34).

Geiger was criminally convicted in the Eastern District of Tennessee before the Court on August 16, 2004 (Case No. 1-02-cr-187, Court File No. 221). Geiger was convicted of violations of 18 U.S.C. §§ 1343, 1954, 1956(h) and 1957 (Case No. 1-02-cr-187, Court File No. 323). Geiger's criminal convictions stem from the same underlying events that resulted in Plaintiffs' civil actions (Case No. 1-02-cr-187, Court File No. 221). Geiger was ordered to pay $6,700,000 in restitution to PBGC as part of his sentence (Case No. 1-02-cr-187, Court File No. 323). Geiger's criminal case is currently on appeal (Case No. 1-02-cr-187, Court File No. 321).


A. Standard of Review

Although Geiger's motion to dismiss does not state what rule it is brought under, the Court interprets it as a motion to dismiss pursuant to FED. R. CIV. P. 12(b)(6). A motion to dismiss pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure requires the Court to construe the complaint in the light most favorable to the plaintiff, accept all the complaint's factual allegations as true and determine whether "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101-02, 2 L.Ed. 2d 80 (1957). See also Cameron v. Seitz, 38 F.3d 264, 270 (6th Cir. 1994). The Court may not grant such a motion to dismiss based upon a disbelief of a complaint's factual allegations. Miller v. Currie, 50 F.3d 373, 377 (6th Cir. 1995) (noting courts should not weigh evidence or evaluate the credibility of witnesses); Lawler v. Marshall, 898 F.2d 1196, 1199 (6th Cir. 1990). The Court must liberally construe the complaint in favor of the party opposing the motion. Miller, 50 F.3d at 377. The complaint, however, must articulate more than a bare assertion of legal conclusions. Scheid v. Fanny Farmer Candy Shops, Inc., 859 F.2d 434, 436 (6th Cir. 1988). "[The] complaint must contain either direct or inferential allegations respecting all the material elements to sustain a recovery under some viable legal theory." Id. (citations omitted).

B. Analysis

Geiger filed a motion to dismiss claiming Plaintiffs' civil actions violate the Fifth and Eighth Amendments of the United States Constitution (Court File No. 63). Specifically, Geiger claims Plaintiffs are violating the Double Jeopardy Clause of the Fifth Amendment and the Excessive Fines Clause of the Eighth Amendment. See U.S. CONST. amends. V, VIII. The relevant provision of the Fifth Amendment provides no "person [shall] be subject for the same offense to be twice put in jeopardy of life or limb." U.S. CONST. amend. V. The Eighth Amendment provides "nor [shall] excessive fines [be] imposed." U.S. CONST. amend. VIII. The Court will address each argument in turn.

1. Double Jeopardy

Geiger claims Plaintiffs' actions must be dismissed because they violate the Fifth Amendments' prohibition of double jeopardy for the same offense. Geiger claims the civil cases are brought for retributive punishment and deterrent purposes. Furthermore he argues the suits seek non-remedial judgments and are equivalent to a second prosecution for his conduct (Court File No. 63). Only criminal punishment runs afoul of the Double Jeopardy Clause. Hudson v. United States, 522 U.S. 93, 99 (1997).*fn2

When determining if a successive punishment violates the Double Jeopardy Clause, a court must determine if the legislature has expressly or impliedly categorized the proceeding as civil or criminal. Id. If the punishment is civil, a court must determine if the statutory scheme is so punitive in purpose or effect as to transform the penalty into a criminal sanction. Id. (citations omitted). To make this determination, a court should look at the following factors:

(1) "whether the sanction involves an affirmative disability or restraint"; (2) "whether it has historically been regarded as a punishment"; (3) "whether it comes into play only on a finding of scienter"; (4) "whether its operation will promote the traditional aims of punishment -- retribution and deterrence"; (5) "whether the behavior to which it applies is already a crime"; (6) "whether an alternative purpose to which it may rationally be connected is assignable for it"; and (7) "whether it appears excessive in relation to the alternative purpose assigned."

Id. at 99-100 (citation omitted). The factors are applied to the face of the relevant statute with "only the clearest proof suffic[ing] to override legislative intent and transform what has been denominated a civil remedy into a criminal penalty." Id. at 100 (internal quotation marks omitted) (citation omitted).

Plaintiffs bring their actions pursuant to ERISA's civil enforcement provisions. 29 U.S.C. § 1132. Plaintiffs are both empowered to bring their suits under 29 U.S.C. § 1132. Because Congress has designated this type of action as civil, there must be "the clearest proof" the punishment is criminal. Hudson, 522 U.S. at 104.

The Court will now examine the factors to determine if the effect of ERISA transforms the penalty into a criminal sanction. First, the civil penalties and injunction Plaintiffs seek are not an affirmative disability or restraint. In Hudson, where the petitioner was prohibited from participating in the banking industry and was forced to pay a civil fine, the Supreme Court stated this punishment was "certainly nothing approaching the 'infamous punishment' of imprisonment." Id. Because the relief sought by Plaintiffs is for monetary damages and injunctive relief, the possible sanctions do not involve an "affirmative disability or restraint." Id.

Second, the possible sanctions in this case have not been historically regarded as punishment. The Hudson court found similar sanctions could not be characterized as "so punitive in form and effect as to render them criminal despite Congress' intent to the contrary." Id. Third, no finding of scienter is required to find Geiger liable under ERISA. A violation of fiduciary duty under ERISA is actionable regardless of the defendant's state of mind.

Fourth, the Court does note a finding of liability and injunctive relief will deter future prospective wrongdoers. However, the Hudson court found "the mere presence of this purpose is insufficient to render a sanction criminal, as deterrence may serve civil as well as criminal goals." Id. at 105. The mere presence of a deterrent effect in this case is not enough. Id. Fifth, the fact that criminal prosecution arises from the same facts is not enough to transform the punishment into criminally punitive sanctions. See id. (holding fact that petitioner was indicted for same conduct was not enough to transform injunction and civil penalties into criminal punishment). Lastly, recouping the losses for the Plans and barring Geiger from being a trustee for benefit plans in the future is rationally related to the legitimate government objective, is connected to the loss incurred and is not excessive because Plaintiffs only seek what was lost as a result of Geiger's actions. Because there is no clear proof of punishment, Plaintiffs' civil actions do not violate the Fifth Amendment prohibition against double jeopardy.

2. Excessive Fines

The Supreme Court has held the Excessive Fines Clause of the Eighth Amendment applies "primarily, and perhaps exclusively, to criminal prosecutions and punishments." Browning-Ferris Indus. v. Kelco Disposal, 492 U.S. 257, 262 (1989). [T]he text of the Amendment points to an intent to deal only with the prosecutorial powers of government." Id. at 275. "[T]he history of the Eighth Amendment convinces us that the Excessive Fines Clause was intended to limit only those fines directly imposed by, and payable to, the government." Id. at 268.

The Court is not persuaded Plaintiffs' civil actions violate the Eighth Amendment. Any recovery in this case is not a fine under the Eighth Amendment because it would not be a payment to the Government that "constitutes punishment for an offense." United States v. Bajakajian, 524 U.S. 321, 328 (1998). Any recovery would be paid to the Government to recover what was lost by the Plans and not as a punishment for the ERISA violation. Furthermore, a judgment for Plaintiffs will not result in double recovery. "Any amount paid to a victim under an order of restitution shall be reduced by any amount later recovered as compensatory damages for the same loss by the victim in any Federal civil proceeding." 18 U.S.C. ยง 3664(j)(a)(1). Plaintiffs have the authority under ERISA to recover any damage to a benefit plan due to a breach of fiduciary duty. Although Geiger argues any recovery will be grossly disproportionate to the loss, Plaintiffs only seek a remedial recovery to recover any alleged loss caused by Defendants. All money recovered will directly correlate with losses suffered by the Plans. Plaintiffs' prospective ...

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