Judge Won't Force Arbitration Of Receiver's Suit Against Law Firm That Allegedly Aided $100 Million Timber Ponzi Scheme

Madison Timber would not have grown without Defendants’ encouragement and assistance. Defendants lent their influence, their professional expertise, and even their clients to Adams. They made a fraudulent enterprise a fraternity. Defendants contributed to the success of the Madison Timber Ponzi scheme, and therefore to the debts of the Receivership Estate to investors.

- Receiver’s Lawsuit against Baker Donelson, Butler Snow, and others.

A Mississippi federal judge dashed efforts by a national law firm to send a lawsuit filed by the court-appointed Receiver for a $100 million timber Ponzi scheme to arbitration, holding that ambiguities in the contract between the Ponzi schemer and the law firm about the parties’ intended method of resolving disputes weighed against sending the case to arbitration. Alysson Mills, the court-appointed receiver for the Madison Timber Properties Ponzi scheme run by Arthur Lamar Adams, filed a lawsuit in December 2018 alleging that several law firms, including Butler Snow, contributed to and aided Adams’ Ponzi scheme. The law firm has appealed the Court’s decision.

The Scheme

Adams touted Madison Timber to investors as a timber harvesting company that could provide annual returns ranging from 12% to 15% through the harvest of timber from plots of lands owned by third parties.  In many cases, investors were told that they had sole rights to timber harvested from specific plots of lands.  Investments were typically memorialized by a one-year promissory note that could be rolled over, a timber deed and cutting agreement, a security agreement, a tract summary with the purported timber value, and a title search certificate.  Adams and Madison raised over $160 million from 150 investors throughout the southeastern United States that would purportedly be used to purchase additional timber tracts.  

Many of these promises, however, were false. Adams never obtained the requisite harvesting rights to the land as he had claimed, and he also forged many of the investment documents provided to investors including the timber deed and cutting agreements as well as the tract summary showing the purported timber value.  In many cases, the same plots of land (to which he had no rights) were pledged to multiple parties.  Adams also misappropriated investor funds for unauthorized purposes, including for his own personal benefit and the development of unrelated construction projects in Oxford and Starkville, Mississippi.  New investor funds were also used to pay returns to existing investors - a classic hallmark of a Ponzi scheme. Adams was charged by civil and criminal authorities in May 2018, pleaded guilty, and was sentenced to a 20-year term in October 2018.

The Receiver Sues Law Firms That Provided Services To Madison Timber

Following her appointment, the Receiver learned that several well-known law firms had provided various services to Madison Timber prior to the scheme’s collapse and subsequently filed a complaint in late 2018 naming Butler Snow, Baker Donelson, and other defendants.

Butler Snow, a Mississippi-based firm, was originally hired by Madison Timber back in 2009 to assist in preparing a private placement memorandum (“PPM”) for a related fund outlining Adam’s vision to raise investor funds based on his timber strategy. While the fund did not raise any investments, the PPM succeeded in introducing investors to Madison Timber who entered into joint ventures with the company. Several years later, Madison Timber hired Butler Snow’s newly-created subsidiary, Butler Snow Advisory Services (“BSAS”) to raise $30 million to $50 million from new investors. According to the terms of this arrangement, BSAS agreed to pitch Madison Timber to wealthy clients in exchange for a $3,500 monthly retainer, commissions for each completed transaction, a portion of the fund’s management and carried interest fees, and other expenses.

The Receiver alleges that BSAS quickly went to work, using pitches to solicit investors that peddled the secrecy of Adams’ investments by claiming that Adams “has an extremely stringent NDA with his mill partners.” On another occasion, investors were told by BSAS’s CEO that Madison Timber:

“been vetted by several $1.5 billion family office(s) in Texas, encompassing a 75+ day due diligence period [and] as you would imagine, Lamar passed with flying colors!”

According to the Receiver, each of these claims were false; Adams did not have any NDAs with mill partners because, in fact, he did not have any mill partners. And investors were not told that the family office that purportedly vetted Adams’ scheme ultimately declined to invest. During that time, investors poured into Madison Timber which resulted in commissions for BSAS.

The Receiver alleged that Butler Snow lawyers and salesmen “recklessly ignored numerous red flags,” including their failure to ever call a landowner or mill to verify Adams’ claims or verify a title prepared by Adams.

The Motion to Compel Arbitration

The Butler Snow Parties, comprised of Butler Snow, BSAS, and BSAS’s CEO, subsequently moved to compel arbitration of the Receiver’s claims based on what they contended was Madison Timber’s agreement in its engagement agreement to arbitrate any disputes. The operative agreement between the parties was a seven-page contract containing an “Engagement Letter” and corresponding “Standard Terms.” As the Court succinctly explained:

The dilemma can be stated simply. In the Engagement Letter, the parties agreed to the following:

“The state and federal courts in Mississippi shall have exclusive jurisdiction in relation to any claim, dispute or difference concerning this Engagement Contract and any matter arising from it. The parties hereto irrevocably waive any right they may have to object to any action being brought in that Court, to claim that the action has been brought to an inconvenient forum or to claim that that Court does not have jurisdiction.”

This is a typical forum selection clause.

In the Standard Terms, however, the parties agreed

“to sub‐ mit their dispute to binding arbitration under the authority of the Federal Arbitration Act. . . . [T]he parties hereby waive trial in a court of law or by jury.”

The parties disagree as to which term applies to this case.

The Receiver opposed the Motion to Compel Arbitration, noting that “[t]he veil of arbitration is in no one’s interest, except Butler Snow’s.”

The Court focused on the plain language of the contracts, noting that the parties certainly had the ability to write the outcome urged by the Butler Snow Parties in the contract but did not. Ultimately, the Court concluded that the inherently-conflicting provisions rendered the contract ambiguous and thus prevented the Court from determining “which provision the parties intended to be dispositive.” The Court also ordered the claims stayed while Butler Snow pursued an interlocutory appeal.

The Court’s Order is below: