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Neitzke v. Lowrance

October 6, 2010

MARK NEITZKE, PAUL A. VIS, JULIE VIS, BILL VIS, RON BROWN, JANICE BROWN, BRENDA AGUILAR, SEACREST MANAGEMENT, DUANE R. ANDERSON, MIKE ANDERSON, JOHN ARMSTRONG, GARY ARNELL, CLENETH ARNELL, DALLEN S. ATACK, LUJUANA BADGER, SPRINGFIELD INVESTMENTS LLC, CODY BAIR, BRUCE BAIRD, BRIAN R. BAIRETT, BAT INVESTMENT GROUP LLC, ANDREW BAUMAN, SCOTT BENSON, ANTHONY L. BENZINGER, TINA L. BENZINGER, BRIAN J. BLACK, DARLENE BORZENSKI, DAVID T. BOURGEOIS, BRIAN BOWER, ELIZABETH BOWER, RICHARD S. BOYER, LORI BOYER, ROBERT D. BRADEN, KYLE BRADFORD, GARY BROCKBANK, GARY H. BROCKBANK SEP IRA, GARY H. BROCKBANK MDS, DUNCAN H. BROCKBANK, DUNCAN H. BROCKBANK IRA, DOROTHY D. BROCKBANK, JOSHUA M. BROCKBANK IRA, NORMAN BROCKBANK, W. HUGHES BROCKBANK, W HUGHES BROCKBANK-LIVING TRUST, KIMBERLY B. BROCKBANK IRA, PENNY BROWN, DAVID CHYTKA, MARY S. CLAEYS, DANIEL CLARK, RUSSELL CLARK, ADAM R. CLARKE, JERRY P. CLAUNCH, SCOTT D. CLAUCH, SHIRLEY M. CLAUCH, TORY CLAYTON, AZA B. CLINE, DIANA COE, JO ANN COELHO-ROSE, CADE COLTRIN, NATASHA COLTRIN, CORY G. COLTRIN, ANGELO CONTINO, JOE O. COTTON, MARVIN CURTIS, MARVIN BENJAMIN CURTIS, ERICA J. DAVIS, TODD R. DAYLONG, CLIFFORD E. DENDEKKER, WILLY T. DENDEKKER, TJAPKO DETMERS, MARY LOU DETMERS, LARRY E. DEWEY, ROBIN A. DEWEY, FRED DICKERSON, RANDY DIRKS, PATRICK DONOHOE, COLLIN DVORK, RICHARD DVORK, CHARLES ENGLISH, BRUCE ESKANDER, STEFANIE ESKANDER, CHRIS R. EVANS, SHAWN EVENSON, INGE FAN, RAY FARKAS, PAULA J. FARKAS, RICHARD W. FEATHERSTONE, ELIZABETH A. FEATHERSTONE, DARWIN FIELDING, TRACI A. FINE, MAREEN DUNCAN-FISHER, LARRY E. GOODROW, SR., STEVEN L. GOYETCHE, JAMES GOULD, ACCELERATED APPRAISALS LLC, CRAIG GREEN, HAZEL GREEN, BENJAMIN S. GREENWOOD, JEFFREY HADERLIE, DAN HALBACH, JARED HARDY, JASON J. HARMELINK, BRYAN HASLAM, JAROM HIBBERT, MARSHALL RANDY A. HUDSON, BONNIE J. HUISH, J. MATTHEW HUISH, TERRY L. HUMBER, CHRISTINA HUMMER, CHARLES D. IRWIN, JAMES JACKSON, WILLIAM JOHANSEN, TEAK JOHNSON, PEGGY JOHNSTON, DAVID SCOTT JOSEPH, JOHN KAHLE, STEPHEN A. KANE, GREGORY KELLER, KAREN KENT, KEVIN KLUMPP, JOSHUA KNAPTON, LISA KNAPTON, TERI KNOCHENMUS, JAMES A. KOBELAK, CAROLYN E. KOBELAK, GARWOOD KOTTIE, DAROLD B. LAABS, HELEN A. LAABS, BETTY R. LAUB, TONY LEBLANC, ROGER LECLAIR, KENNETH LEMINGS, KIMBERLYN LIAL, WARREN J. LONGHURST, RAFAEL LOPEZ, JARED R. LUCAS, THOMAS G. MAILE 5TH, DARIN MALCOLM, LEON D. MALCOM, KERRY L. MALCOM, LOIS A. MARTIN, SALLY MARTINEZ, MELANIE MAXFIELD, JOHN R. MEHL, DANA A. MEIER, RUSSELL R. MILLER, BRANDON MILLER, KENDALL C. MILLER, ROBERT L. MORRISON, TERRI MURPHY, DEANE NAULT, JANET NAULT, JAMES OFFERDAHL, DAN L. OSTROM, ROSA OTERO, DAVE E. OVESON, TERRY PANTALEO, KELLY PARSONS, JAMES D. PAXMAN, ANDREA PENNERS, DAVID PERRY, BRYAN PHILLIPS, STEPHEN E.PHILO, KATHY M. PHILO, FRED PIERCE, TARA PIERCE, ROBERT T. PIERCE, CHRIS PILLING, TYSON PITCHER, JASON R. RAVNSBORG, ROBERT W. RAYBOULD, GILBERT RAZO, PAUL E. RINKEL, ALICIA A. ROBERTSON, WILLIAM D. ROZAR, PETER SALZMANN, SHARON SALZMANN, MICHAEL SCHMIDT, SCOTT SCHOBER, RONALD SCHOBER, SANDRA SCHOBER, DALE E. SCHWANTES, CALVIN SHELLEY, JANINA SHEPPARD, ROCHELLE SHERIDAN, MICHAEL S. SHERMAN, KATHRYN M. SHERMAN, ELINA B. SIMON, RANDY SMITH, ROGER SMITH, RAYMOND PILLMAN, JR., MICHELLE STATTI, DAVID STOUT, LISA TA'ALA, JAMES D. TAYLOR, JEFFREY J. TESCH, BRYAN R. TEW, TERRY TOMAN, JOHN E. TRACHSEL, TED W. TRONSON, JEFFREY L. TURNER, RYAN TURNER, REBECCA TYBERG, GERALD UITHOVEN, SERGEY N. VARIVODA, DANIEL W. VIS, JEANNE VIS, KAY MARTIN, CHRISTOPHER WALKER, BRYON WALLS TRUST, RW INC., EARLE WELLS, STEPHEN A. WILCOX, MAX WILLARD, TERESA L. WILLARD, MELANIE WILLIAMS, INFINITE ABUNDANCE LLC, KEVIN WILSON, KAYLEEN H. WINKLER, MICHAEL ZIMMERMAN, BRAD ZOBRIST, FRANK HAROLD, COMMAND INVESTMENTS LLC, KJM REAL ESTATE, HURRICANE INVESTMENTS LLC, AXIOM INVESTMENTS LLC, FIELDING FINANCIAL INC., ELKHORN CHIROPRACTIC INC., CABIN HOLLOW HOLDINGS LLC, TEAK LLC, VAN CORTLAND ENTERPRISES, DREAM TEAM ANESTHESIA PC, HYDRO-TEK POOLS INC., OSTROM ENTERPRISES, KUF MANAGEMENT LLC, KP CONSULTING, QUALITY MADE INC., DAVID PECK, AND THE COMMUNITY CHURCH OF GOD, PLAINTIFFS
v.
JEFF LOWRANCE, INDIVIDUALLY, AND D/B/A FIRST CAPITAL SAVINGS & LOAN, A/K/A FIRST CAPITAL SAVINGS & LOAN LIMITED, F/D/B/A MENTOR INVESTING INC., D/B/A SWISS PROVIDENCE, D/B/A LOGOS PUBLISHING GROUP, D/B/A MARKETWISE TRADING SA AND D/B/A USA TOMORROW, DEFENDANTS.



The opinion of the court was delivered by: Karen E. Schreier Chief Judge

ORDER GRANTING PLAINTIFFS' MOTION FOR PUNITIVE DAMAGES AND COSTS

Plaintiffs brought suit against defendant, Jeff Lowrance and his associated entities, for inducing them to invest in Lowrance's Ponzi-type investment scheme. After Lowrance failed to respond to the complaint, this court entered a default judgment. Plaintiffs now move for punitive damages and attorney costs. Lowrance failed to respond to the motion. The motion is granted.

BACKGROUND

Lowrance lured numerous people to invest money with his online trading company. On his website, Lowrance promised potential investors that if they opened a fixed exchange currency deposit account and invested their money with his company, First Capital Savings & Loan, then First Capital would trade the money in the foreign exchange market (FOREX). First Capital's website contained a link to trading statistics in Excel spreadsheets with alleged trade dates and the number of trades. The website contained schedules of the rate of return investors should expect on their initial investments.*fn1 The website also reassured investors that they could withdraw their principal investment after their fund matured, which could be in as little as six months.

Plaintiffs invested their money with Lowrance through First Capital. Plaintiffs allege that Lowrance deceived them from the beginning of their relationship because he made false and misleading statements about how he would invest their money. Specifically, plaintiffs argue that Lowrance made false representations that he was making live trades in the FOREX market, that he had traders making real trades, that he completed FOREX trades, that the money generated from the FOREX trading would better the plaintiffs and the company, and that Lowrance's business activities were successful when really the success was a series of monetary transfers from one client to another through a Ponzi-type scheme. Not only did Lowrance disseminate this false information through First Capital's website, but he also made oral representations to plaintiffs that their investments were making a substantial profit.

Around mid-June 2008, Lowrance failed to make plaintiffs' monthly interest payments and forced plaintiffs to accept a compound method of interest. Plaintiffs became suspicious, but Lowrance reassured plaintiffs that they would receive their principal investments back. Lowrance even set a January 5, 2009, deadline for returning plaintiffs' principal investments, but he failed to return the money to plaintiffs.

Plaintiffs brought this suit against Lowrance and alleged fraud in the inducement, fraudulent mismanagement of accounts, breach of contract, and punitive damages. Lowrance failed to respond to any of plaintiffs' filings and this court entered a default judgment pursuant to Fed. R. Civ. P. 55(a) on September 29, 2009, for $40,386,085 in compensatory damages. The court reserved ruling on punitive damages and costs pending further briefing. Plaintiffs briefed the issue of their entitlement to punitive damages and costs. Lowrance failed to respond to the brief.

ANALYSIS

I. Punitive Damages

A. Punitive Damages Are Appropriate

This action is before the court on diversity grounds and South Dakota state law supplies the substantive law. In South Dakota, general damages do not normally include exemplary or penal damages. SDCL 21-1-4. But plaintiffs may, in certain circumstances, recover punitive damages. Dahl v. Sittner, 474 N.W.2d 897, 900 (S.D. 1991); SDCL 21-3-2. Under SDCL 21-3-2, a plaintiff claiming punitive damages must show that "the defendant has been guilty of oppression, fraud, or malice, actual or presumed." If the plaintiff makes this showing, punitive damages may be given "for the sake of example, and by way of punishing the defendant." SDCL 21-3-2; see also Gross v. Kouf, 349 N.W.2d 652, 654 (S.D. 1984) ("[T]he purpose of awarding punitive damages is to punish the wrongdoer. . . . [T]his [punitive] award should serve as a warning to others").

Before a claim for punitive damages may be submitted to a factfinder, the court must find that a reasonable basis exists to "believe that there has been willful, wanton or malicious conduct on the part of the party claimed against." SDCL 21-1-4.1. The party seeking punitive damages must make this showing by clear and convincing evidence. Id. After the party makes this showing, however, he must only demonstrate to the factfinder by a preponderance of the evidence that he is entitled to punitive damages. Dahl, 474 N.W.2d at 902 (citing Aschoff v. Mobil Oil Corp., 261 N.W.2d 120, 125 (S.D. 1977)).

Plaintiffs argue that Lowrance acted with malice in inducing them to invest their money in his Ponzi-type scheme. All punitive damages claims, even if based on a theory of fraud, require a showing of either actual or presumed malice. Id. at 900. "Actual malice is a positive state of mind, evidenced by the positive desire and intention to injure another, actuated by hatred or ill-will towards that person." Id. (citing Gamble v. Keyes, 178 N.W. 870, 872 (S.D. 1920)). A person acts with actual malice when his actions are intentional. Moosmeier v. Johnson, 412 N.W.2d 887, 890 (S.D. 1987).

After a review of the evidence, the court finds that Lowrance intentionally preyed on plaintiffs and induced them to believe that they would receive a fixed and secure interest rate in return for their principal investment. In part, ...


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