Perkins v. Haines - Bronner Answer Brief

Case: 10-10683
Date Filed: 07/01/2010
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UNITED STATES COURT OF APPEALS FOR THE ELEVENTH CIRCUIT NO. 10-10683-BB
WILLIAM F. PERKINS, PLAN TRUSTEE FOR INTERNATIONAL MANAGEMENT ASSOCIATES, LLC Appellant, v. AENA Y. HAINES, ET AL Appellees
ON DIRECT APPEAL FROM THE UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF GEORGIA, ATLANTA DIVISION RESPONSE BRIEF OF JAMES BRONNER, NATHANIEL BRONNER AND SIMONE BRONNER
Robert J. Mottern Georgia Bar No. 526795 Investment Law Group of Gillett, Mottern & Walker, LLP 1230 Peachtree Street, N.E., Suite 2445 Atlanta, Georgia 30309 Tel: 404-607-6933 Fax: 678-840-2126
www.floridalegalblog.org
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CERTIFICATE OF INTERESTED PERSONS AND CORPORATE DISCLOSURE STATEMENT Appellees James Bronner, Nathaniel Bronner and Simone Bronner hereby incorporate by reference the Certificate of Interested Persons filed by the Appellant.
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STATEMENT REGARDING ORAL ARGUMENT Appellees James Bronner, Nathaniel Bronner and Simone Bronner do not believe that oral argument is necessary or will materially aid the Court's decision of this appeal.
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TABLE OF CONTENTS CERTIFICATE OF INTERESTED PERSONS AND CORPORATE DISCLOSURE STATEMENT ..................................................................................2 STATEMENT REGARDING ORAL ARGUMENT ...............................................3 TABLE OF CONTENTS ...........................................................................................4 TABLE OF CITATIONS ..........................................................................................5 STATEMENT OF THE ISSUES...............................................................................6 SUMMARY OF THE ARGUMENT ........................................................................7 ARGUMENT AND CITATIONS OF AUTHORITY ..............................................9 A. DEFRAUDED EQUITY INVESTORS HAVE A CLAIM AT THE TIME OF INVESTMENT.................................................................................................9 B. PAYMENTS THAT ONLY DEFRAUD EQUITY INVESTORS MAY NOT BE RECOVERED AS FRAUDULENT TRANSFERS .............................11 1. If Equity Investors Are Not Creditors, Then No Creditor Was Defrauded By Payments To Equity Investors.....................................................................12 2. If Equity Investors Are Not Creditors, Then The Debtors Were Not Insolvent ............................................................................................................14 CONCLUSION ........................................................................................................15 CERTIFICATE OF COMPLIANCE .......................................................................18 CERTIFICATE OF SERVICE ................................................................................19
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TABLE OF CITATIONS Cases AFI Holding, Inc., 525 F.3d 700 (9th Cir. 2008) .......................................................9 Bauman v. Bliese, et al. (In re McCarn 's Allstate Fin., Inc.), 326 B.R. 843, 850 (Bankr. M.D. Fla. 2005) .......................................................................................13 In re Bayou Group, LLC, 362 B.R. 624 (Bankr.S.D.N.Y. 2007) ............................13 In re Terry Manufacturing Company, Inc., 2007 WL 274319 (Bankr.M.D.Ala. 2007) .......................................................................................................................9 Jobin v. Lalan (In re M & L Business Machine Co., Inc.), 160 B.R. 851, 857 (Bankr. D. Colo. 1993), aff'd, 167 B.R. 219 (1994) .............................................13 Quilling v. Stark, 2006 U.S. Dist. LEXIS 40672, 2006 WL 1683442, at 6 (N.D. Tex. June 19, 2006) ......................................................................................................13 Rieser v. Hayslip, et al. (In re Canyon Sys. Corp.), 343 B.R. 615, 636-37 (Bankr. S.D. Ohio 2006) ....................................................................................................13 Terry v. June, 432 F. Supp. 2d 635, 639 (W.D. Va. 2006) ......................................13 Statutes 11 U.S.C. 101(10) ...................................................................................................9 11 U.S.C. 101(5) .....................................................................................................9 11 U.S.C. 548 ................................................................................................ passim 11 U.S.C. 548(a) ........................................................................................... passim 11 U.S.C. 548(c) ...................................................................................................16 O.C.G.A. 18-2-70, et seq. ......................................................................................10 O.C.G.A. 18-2-71(3) ..............................................................................................11 O.C.G.A. 18-2-78(a) ..............................................................................................10
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STATEMENT OF THE ISSUES 1) Whether an equity investor in an enterprise which is later revealed to be a fraudulent scheme (i.e., a ponzi scheme) has a claim against the fraudulent enterprise at the time of the investment, which claim is satisfied by any payments subsequently received from the fraudulent enterprise up to the amount of the original investment. 2) If equity investors in an enterprise which is later revealed to be a fraudulent scheme do not have claims against the fraudulent enterprise at the time of their investment, whether any payments made to equity investors prior to the collapse of the fraudulent enterprise that only serve to defraud other equity investors and not general creditors of the enterprise may be recovered as fraudulent transfers. 3) If equity investors in an enterprise which is later revealed to be a fraudulent scheme do not have claims against the fraudulent enterprise at the time of their investment, whether the investments made by equity investors can be treated as liabilities for purposes of determining whether the enterprise was insolvent at the time any payments were made to such equity investors.
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SUMMARY OF THE ARGUMENT This case concerns a series of lawsuits filed by the Trustee to recover payments made to equity investors in the Debtors prior to the collapse of the Debtors fraudulent enterprise. Most, if not all, of the equity investors have
asserted a defense that the payments to them are not recoverable because they were received in good faith, without knowledge of the fraud, and for value, with the value being the satisfaction of their latent claim for rescission based on the Debtors fraud. The Trustee contends that the defense is not applicable on the grounds that a latent claim, unknown to the claimant at the time of receipt of the payment, does not qualify as a claim for purposes of the defense. The Bronners contend that a claim is defined under the Bankruptcy Code and the Georgia Uniform Transfer Act in the broadest way possible, such that knowledge is not a requirement, and that this Court may not read a knowledge requirement into the definition where the applicable legislatures did not chose to add one explicitly. The Trustees argument for recovery of payments is also based on the circular and inconsistent argument that equity investors were creditors for some purposes but not for others, despite the fact the applicable statutory definitions do not permit such an inconsistent use of the term. For example, the Trustee argues that equity investors are not creditors for purposes of any payments they might
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have received, but are creditors for purposes of determining whether the Debtors were and are insolvent at the time of the payment and for purposes of determining whether any creditors were defrauded by the payments. Contrary to the Trustees characterization of the Debtors as businesses with little or no net worth, the Debtors were quite solvent, as the Trustee recovered over ten times more in assets than debts to general creditors (i.e., excluding claims of equity investors based on their equity investment). The Trustees plan provided
for subordination of equity investors claims and full payment of non-equity investor creditors, who have presumably long since been paid in full. Thus, the fraudulent transfer laws are being used not to effect a more equitable distribution of the assets of the Debtors among creditors, but to effect a redistribution of assets among equity investors only. That is not the intent and purpose of the fraudulent transfer laws, and therefore the Trustees claims should be denied entirely.
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ARGUMENT AND CITATIONS OF AUTHORITY A. DEFRAUDED EQUITY INVESTORS HAVE A CLAIM AT THE TIME OF INVESTMENT The vast majority of courts have held that an investor who receives payment from a ponzi scheme gives value up to the amount of the principal invested by the investor, based on the fact that the payment satisfies a fraud or rescission claim that the investor would have absent receipt of the payment. See, e.g, AFI Holding, Inc., 525 F.3d 700 (9th Cir. 2008). The Trustee can cite only one case which did not follow this line of reasoning. In re Terry Manufacturing Company, Inc., 2007 WL 274319 (Bankr.M.D.Ala. 2007). The Bronners submit that AFI Holding, Inc., and the numerous cases holding likewise, are well reasoned and should be followed by this Court. The Bronners dispute the Trustees argument that they do not hold claims against the Debtors estates based on the amount they invested in the Debtors ponzi scheme. The term creditor means any entity that has a claim. 11 U.S.C. 101(10). 11 U.S.C. 101(5) defines a claim in the broadest possible sense, as follows: (5) The term "claim" means (A) right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured; or
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(B) right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, or unsecured. Importantly, the Bankruptcy Code does not say that an entity must have knowledge that it has a claim in order to be considered a creditor. The definitions for creditor and claim are two of the most central definitions in the entire Bankruptcy Code. This Court should not rewrite the definitions by adding a knowledge requirement to the definitions of creditor and claim as suggested by the Trustee, because that is more properly the function of Congress and would throw more than a century of bankruptcy precedent into doubt. The Trustee also seeks to recover fraudulent transfers under the Uniform Fraudulent Transfer Act as passed in the State of Georgia, O.C.G.A. 18-2-70, et seq. (the Georgia Fraudulent Transfer Act). The Georgia Fraudulent Transfer Act also provides a defense to any payee who received an alleged fraudulent transfer in good faith and for reasonably equivalent value. See O.C.G.A. 18-278(a). And, the Georgia Fraudulent Transfer Act also defines a claim in a manner similar to the way claim is defined under the Bankruptcy Code: "Claim" means a right to payment, whether or not the right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured,
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unmatured, disputed, undisputed, legal, equitable, secured, or unsecured. O.C.G.A. 18-2-71(3). In particular, as under the Bankruptcy Code, knowledge of a claim is not necessary for a person to hold a claim. Therefore, under the current definitions of claim under both the Bankruptcy Code, and the Georgia Uniform Fraudulent Transfer Act, equity investors in the fraudulent enterprise at issue in this case had a claim against the enterprise for fraud and rescission at the time they invested, notwithstanding their lack of notice of such claims at the time of their investment or the time of receipt of payments from the scheme. Accordingly, all such investors who received
payments from the scheme gave value to the scheme in the form of satisfaction of their claims, at least up to the amount of their investment. B. PAYMENTS THAT ONLY DEFRAUD EQUITY INVESTORS MAY NOT BE RECOVERED AS FRAUDULENT TRANSFERS A holding that investors in the Debtors ponzi scheme were not creditors on the date they invested would render the Trustee unable to prove the basic elements of a fraudulent transfer to the investors under either the actual fraud provisions of 11 U.S.C. 548(a)(1)(A) or the constructive fraud provisions of 11 U.S.C. 548(a)(1)(B).1
While the discussion herein is of federal fraudulent transfer provisions found in 11 U.S.C. 548, the analysis also applies to claims brought by the Trustee under
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1. If Equity Investors Are Not Creditors, Then No Creditor Was Defrauded By Payments To Equity Investors If equity investors in a fraudulent enterprise are not creditors until the fraudulent scheme is revealed, then any payments made to equity investors prior to the collapse of the fraudulent enterprise that only serve to defraud other equity investors and not general creditors of the enterprise may not be recovered as fraudulent transfers. The actual fraud cause of action under 11 U.S.C. 548(a)(1)(A) provides that a fraudulent transfer occurs when a transfer is made with actual intent to hinder, delay, or defraud any entity to which the debtor was or became, on or after the date that such transfer was made or such obligation was incurred, indebted. As many courts have recognized, the parties who are generally defrauded by payments made by a ponzi scheme to its investors are not general creditors but rather existing investors (who are defrauded by the existence of the payments into making additional investments in the ponzi scheme) or future investors (who were defrauded by the existence of the payments into making an original investment in
the Georgia Uniform Fraudulent Transfer Act because the legal standard for recovery is essentially the same in all material respects.
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the ponzi scheme).
See, e.g., In re Bayou Group, LLC, 362 B.R. 624
(Bankr.S.D.N.Y. 2007).2 In this case, the only parties who were defrauded by the Debtors payments to equity investors were other equity investors in the same scheme because, in the end, the liquidation of the Debtors assets resulted in proceeds that were over ten times the amount of non-investor claims against their estates. In particular,
Schedule DS-7 to the Trustees Disclosure Statement indicates that the Debtors only had about $800,000 of non-investor claims. Response of Nathaniel and Simone Bronner to Trustees Motion for Partial Summary Judgment (Bronner Response), Page 10. However, Schedule DS-5 to the Trustees Disclosure
Statement reflects that the Trustee had realized $8,513,218.25 from the liquidation
Quilling v. Stark, 2006 U.S. Dist. LEXIS 40672, 2006 WL 1683442, at 6 (N.D. Tex. June 19, 2006) ("The existence of a Ponzi scheme as alleged in the complaint makes the transfer of investor funds fraudulent as a matter of law."(citation omitted)) (emphasis in original); Terry v. June, 432 F. Supp. 2d 635, 639 (W.D. Va. 2006) ("[C]ourts have widely found that Ponzi scheme operators necessarily act with actual intent to defraud creditors due to the very nature of their schemes."); Jobin v. Lalan (In re M & L Business Machine Co., Inc.), 160 B.R. 851, 857 (Bankr. D. Colo. 1993), aff'd, 167 B.R. 219 (1994) ("[I]n a Ponzi scheme the only inference that a court can make is that the Debtor had the requisite intent to hinder, delay or defraud under 548(a)(1)."). See also, Bauman v. Bliese, et al. (In re McCarn 's Allstate Fin., Inc.), 326 B.R. 843, 850 (Bankr. M.D. Fla. 2005) ("Bankruptcy courts nationwide have recognized that establishing the existence of a Ponzi scheme is sufficient to prove a Debtor's actual intent to defraud."); Rieser v. Hayslip, et al. (In re Canyon Sys. Corp.), 343 B.R. 615, 636-37 (Bankr. S.D. Ohio 2006) (holding that "[a]ctual intent to hinder, delay or defraud may be established as a matter of law in cases in which the debtor runs a Ponzi scheme or a similar illegitimate enterprise").
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of the Debtors assets, an amount that is over ten times the amount of non-investor claims against the Debtors. Bronner Response, Page 8. Furthermore, the Trustees plan subordinates any claim by equity investors and provides for full payment of non-investor claims. 11 U.S.C. 548 (and the comparable provision of the Georgia Uniform Fraudulent Transfer Act) only authorizes the Trustee to recover payments that serve to hinder, delay or defraud creditors. If Court adopts the Trustees
argument that the equity investors who invested in the Debtors ponzi scheme are not creditors, then no actual fraud occurred in any of the Debtors payments to investors since all of the available evidence indicates that the Debtors estates were grossly solvent at all times. 2. If Equity Investors Are Not Creditors, Then The Debtors Were Not Insolvent
The constructive fraud cause of action under 11 U.S.C. 548(a)(1)(B) provides that a fraudulent transfer exists if the debtor makes a transfer for less than reasonably equivalent value and was insolvent or became insolvent as part as a result of the transfer. If equity investors in the Debtors ponzi scheme are creditors to the extent of the amount of their principal invested in the scheme, then distributions to the equity investors up to the amount of principal they invested gave the Debtors received reasonably equivalent value by the satisfaction of their tort/rescission claims. However, if such equity investors are not creditors to the
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extent of the amount of their principal invested in the scheme, then the Debtors may not have received reasonably equivalent value for the transfers, but no claim would exist for constructive fraud because the Debtors were insolvent only by virtue of the tort/rescission claims of those equity investors. In this case, Schedule DS-7 indicates that the Debtors only had about $800,000 of non-investor claims. Bronner Response, Page 10. However, Schedule DS-5 to the Trustees Disclosure Statement reflects that the Trustee had realized $8,513,218.25 from the liquidation of the Debtors assets, an amount that is over ten times the amount of non-investor claims against the Debtors. Bronner
Response, Page 8. Indeed, the Trustees plan subordinates any claim by investors and provides for full payment of non-investor claims. If the equity investors in the Debtors ponzi scheme were not bona fide creditors at the time they received made their investments and received payments thereon, then the evidence clearly indicates that the Debtors were not insolvent then (or now), and thus no fraudulent transfers occurred as defined in 11 U.S.C. 548(a)(1)(B). CONCLUSION The Trustees analysis would require that the Court adopt circular, illogical and inconsistent definitions of the term claim and creditor. The Trustee
believes that all equity investors have claims for the amount they invested in the
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Debtors ponzi scheme for purposes of determining whether the Debtors were insolvent under 11 U.S.C. 548(a)(1)(B), but not for purposes of determining whether value was given in conjunction with the investors good faith defense under 11 U.S.C. 548(c). Similarly, the Trustee believes that all investors have claims for the amount they invested in the Debtors ponzi scheme for purposes of determining whether the Debtors payments to equity investors defrauded creditors under 11 U.S.C. 548(a)(1)(A), but not for purposes of determining whether value was given in conjunction with the investors good faith defense under 11 U.S.C. 548(c). To date, no court which has thoroughly analyzed the issues has followed the Trustees tortured reasoning, and this Court should not either. If investors have a claim for one purpose, then they should have a claim for all purposes, unless and until Congress (and the Georgia Legislature) specifies otherwise with a proper amendment to the relevant Bankruptcy Code (and Georgia Uniform Fraudulent Transfer Act) sections.
_________________________ Robert J. Mottern Georgia Bar No. 526795 Investment Law Group of Gillett, Mottern & Walker, LLP 1230 Peachtree Street, N.E., Suite 2445 Atlanta, Georgia 30309 Tel: 404-607-6933 Fax: 678-840-2126
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Attorney for James Bronner, Nathaniel Bronner and Simone Bronner
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CERTIFICATE OF COMPLIANCE
I certify that this brief complies with the type-volume limitation set forth in Fed.R.App.P. 32(a)(7)(B) because this brief contains 1,574 words, excluding parts of the brief exempted by Fed.R.App.P. 32(a)(7)(B)(iii).
_________________________ Robert J. Mottern Georgia Bar No. 526795 Investment Law Group of Gillett, Mottern & Walker, LLP 1230 Peachtree Street, N.E., Suite 2445 Atlanta, Georgia 30309 Tel: 404-607-6933 Fax: 678-840-2126 Attorney for James Bronner, Nathaniel Bronner and Simone Bronner
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CERTIFICATE OF SERVICE I hereby certify that on the 1st day of July, 2010, I caused to be served a true and correct copy of the foregoing RESPONSE BRIEF OF APPELLEES JAMES BRONNER, NATHANIEL BRONNER AND SIMONE BRONNER and accompanying appendix via First Class US Mail postage prepaid on the parties listed on the exhibit attached hereto.
_________________________ Robert J. Mottern Georgia Bar No. 526795 Investment Law Group of Gillett, Mottern & Walker, LLP 1230 Peachtree Street, N.E., Suite 2445 Atlanta, Georgia 30309 Tel: 404-607-6933 Fax: 678-840-2126 Attorney for James Bronner, Nathaniel Bronner and Simone Bronner
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SERVICE LIST Greg T. Bailey Attorney at Law 571 Culberson Street Atlanta, GA 30310 Joshua S. Barlow Lee Harrington Jonathan Sablone Timothy W. Mungovan Nixon Peabody 100 Summer Street Boston, MA 02110-2106 Colin Bernardino Kilpatrick Stockton 1100 Peachtree St. NE #2800 Atlanta, GA 30309
Bryan Eugene Bates Mark S. Kaufman McKenna Long Aldridge 3030 Peachtree St. NE #5300 Atlanta, GA 30308 Heather D. Brown Kitchens Kelly Gaynes, P.C. 3495 Piedmont Rd. NE STE 11-900 Atlanta, GA 30305-1755 Jonathan H. Fain Jonathan H. Fain & Associates, PC 66 Lenox Pointe Atlanta, GA 30324
Thomas M. Byrne Sutherland, Asbill & Brennan 999 W. Peachtree St. NW Atlanta, GA 30309-3819 James K. Knight Jr. Attorney of Law 401 Atlanta Street Marietta, GA 30060
William R. Lester Fryer, Shuster & Lester, P.C. 1050 Crown Pointe Parkway, Suite 410 Atlanta, GA 30338 Christopher Dubree Phillips Lamberth, Cifelli, Stokes & Stout, P.A. 3343 Peachtree Rd. NE STE 550 Atlanta, GA 30326-1428
Sharon M. Lewonski Epstein Becker & Green, PC 945 East Paces Ferry Road, Suite 2700 Atlanta, GA 30326 Sblend A. Sblendorio Catosha L. Woods Hoge Fenton Jones & Appel 6155 Stoneridge Dr. Pleasanton, CA 94588
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Paul M. Spizzirri Spizzirri Law Offices 1170 Peachtree Street NE Suite 1200 Atlanta, GA 30309
Kevin A. Stine Baker, Donelson, Bearman, Caldwell & Berkowitz, PC 3414 Peachtree Rd. NE Atlanta, GA 30326-1153
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Case: 10-10683

Date Filed: 07/01/2010

Date Filed: 07/01/2010

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Date Filed: 07/01/2010

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the ponzi scheme).

See, e.g., In re Bayou Group, LLC, 362 B.R. 624

Date Filed: 07/01/2010

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Attorney for James Bronner, Nathaniel Bronner and Simone Bronner

Date Filed: 07/01/2010

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Date Filed: 07/01/2010

Date Filed: 07/01/2010

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