Perkins v. Haines - Initial Brief

Case: 10-10683
Date Filed: 04/23/2010
Page: 1 of 84
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 ___________________________________________________________ BRIEF OF APPELLANT WILLIAM F. PERKINS, PLAN TRUSTEE FOR INTERNATIONAL MANAGEMENT ASSOCIATES, LLC ____________________________________________________________ Colin M. Bernardino Georgia Bar No. 054879 KILPATRICK STOCKTON, LLP 1100 Peachtree Street, Suite 2800 Atlanta, Georgia 30309 Tel: (404) 815-6500 Fax: (404) 815-6555 Mark S. Kaufman Georgia Bar No. 409194 Bryan E. Bates Georgia Bar No. 140856 MCKENNA LONG & ALDRIDGE LLP 303 Peachtree Street, N.E., Suite 5300 Atlanta, Georgia 30308 Tel: (404) 527-4000 Fax: (404) 527-4198
www.floridalegalblog.org
Case: 10-10683
Page: 2 of 84
William Perkins v. Haines, et al; Docket No. 10-10683 CERTIFICATE OF INTERESTED PERSONS AND CORPORATE DISCLOSURE STATEMENT Abdur-Rabbani, Ibrahim Adams, Edwana Anand, Esq., Justin Anderson, Ivy Atlanta Perinatal Associates, P.C. Atlanta Verve, LLC Atwater, Stephen Bailey, Erroll J. Bailey, Esq., Gregory T. Baker, Scott G. Barrett, Thomas Bates, Esq. Bryan E., counsel to Committee of Investors formed pursuant to Plan of Reorganization Bernardino, Esq., Colin Michael, counsel to William F. Perkins, Plan Trustee Bishop, Blaine E., member of Committee of Investors formed pursuant to Plan of Reorganization Bishop, J. Michael Bonapfel, Judge Paul W., Bankruptcy Judge Bond, Annette K. Braxton, James
C-1 of 9
Case: 10-10683
Page: 3 of 84
William Perkins v. Haines, et al; Docket No. 10-10683 Broadfoot, Esq., Herbert C. Bronner, James Bronner, Nathaniel Bronner, Simone Brossard, Mario & Charisse Brumbaugh, Esq., Thomas D. Bryan, Delmena Burkes, K. Burnett, Theodore Busskohl, Charles, member of Committee of Investors formed pursuant to Plan of Reorganization Byrne, Esq., Thomas M. Carter, Michael Central Georgia Anesthesia Services, PC Champagne, Jessie & Joyce Coleman, Esq., Michael V. Coleman, Marco D. Costell, Esq., Jeffrey Lee Cranshaw, Esq., David W. Culton, Leroy Curtis, George Curtis, George Russell C-2 of 9
Case: 10-10683
Page: 4 of 84
William Perkins v. Haines, et al; Docket No. 10-10683 Cutright, Eric Daniels, Jerry A. Daniels, LLC, Jerry A. Danowitz, Esq., Edward F. Davis, Craig Davis, Jo Ann Braxton Dawson, Esq., Heather D. Dearing, Jr., PC, James E. DeCarlo, A. Eskridge DeCarlo, Amanda Eskridge Delk, Esq., Glenn A. DeRobbio, Paul Eason, Esq., Rodney L. Edwards, Cheryl Edwards, III, Robert L. Edwards, Joan Edwards, Terrence J. Elko, Alison M., former counsel to William F. Perkins, Plan Trustee Emerald II Fund, LP, Debtor Fain, Esq., Jonathan H. Farmer, Esq., Kevin M. Flint, Cara C-3 of 9
Case: 10-10683
Page: 5 of 84
William Perkins v. Haines, et al; Docket No. 10-10683 Friday, Kheisha Frison, Jr., Lee A. Gallassero, William J. Gardner, Joseph and Lydia Gayle, Raquel M. Gebhardt, Esq., Guy G. Geddes, Dr., Lloyd Georgia Department of Revenue Gist, Keenan P. Gordon, David E., counsel to Committee of Investors formed pursuant to Plan of Reorganization Greenberg Traurig LLP Grover, Jaswinder S., member of Committee of Investors formed pursuant to Plan of Reorganization GTO Development, LLC Haines, Aena Y. Hall, Duvall & Claude Hall, Evelyn Hall, Keeling Harley-Lewis, Erinn F. Hays & Associates Herbert, Glenn M. Hinckson, Terrence C-4 of 9
Case: 10-10683
Page: 6 of 84
William Perkins v. Haines, et al; Docket No. 10-10683 Hines, Bruce A. and Cynthia Holbein, Esq., Michael F. Hooper, Gregory and Lawrence IMA Real Estate Fund, LLC, Debtor Internal Revenue Service International Management Associates, LLC, Debtor International Management Associates Advisory Group, LLC, Debtor International Management Associates Platinum Group, LLC, Debtor International Management Associates Emerald Fund, LLC, Debtor International Management Associates Taurus Fund, LLC, Debtor International Management Associates Growth & Income Fund, LLC, Debtor International Management Associates Sunset Fund, LLC, Debtor International Medical Systems, LLC Jackson, Linda C. Jeffries, Martin D. Jeter, George L. Johnson, William E., member of Committee of Investors formed pursuant to Plan of Reorganization Jones, Laverne Jones, Vicki L. July, Clarence & Valerie Kaufman, Esq., Mark S., counsel to Committee of Investors formed pursuant to Plan of Reorganization C-5 of 9
Case: 10-10683
Page: 7 of 84
William Perkins v. Haines, et al; Docket No. 10-10683 Kelley, Esq., Mark A. Kilpatrick Stockton LLP, counsel to William F. Perkins, Plan Trustee Knight, Jr., James K. LaBriola, Esq., Stephen T. Laird, David Laird, David & Deborah H. Layne, Esq., Bernadine H. Lester, Esq., William R. Lewonski, Esq., Sharon M. Louis, Charles H. Mair, Manuel F. Mair, Suzanne Maughan, John & Roxanne McBryan, Esq., Louis G. McDade, William McDonnell, Esq., Robert H. McKenna Long & Aldridge LLP, counsel to Committee of Investors formed pursuant to Plan of Reorganization McManners, Thomas P. Meir, Esq., Dennis S., counsel to William F. Perkins, Plan Trustee Miller, Hyacinth Mills, III, Esq., John W., former counsel to William F. Perkins, Plan Trustee C-6 of 9
Case: 10-10683
Page: 8 of 84
William Perkins v. Haines, et al; Docket No. 10-10683 Monnin, Esq., Paul Moore, Joseph Mottern, Robert J. Mt. Nebo Baptist Life Center, Inc. Mungovan, Esq., Timothy W. Noble, Horace ONeal, Roger L., member of Committee of Investors formed pursuant to Plan of Reorganization Office of United States Trustee Paris, Calvin Passyn, Esq., Juanita A. Peoples, Valerie Peoples-Wisneski, Michelle Perkins, William F., Plan Trustee Perkins, William T. Perman, Jenny Lynn Perman, Todd Phillips, Chris D. Phillips, Christopher D. Pinkney, Carol Pinkney, Laura Pinkney, Roland C-7 of 9
Case: 10-10683
Page: 9 of 84
William Perkins v. Haines, et al; Docket No. 10-10683 Platinum II Fund, LP, Debtor Pollack, Charles I. Porter, Jr., John C. Qudsi, Mustafa Randolph, Erich G. Redfern, Fred C. & Sherri D. Reese, James Eric Regan, Sr., Stephen Ricciardi, Anthony Robison, David and Joni Roger ONeal Family Trust Rossi, Elayne R. Rue, James A. Sacca, Esq., James R. Sblendorio, Esq., Sblend A. Secret, Esq., Akil Kenneth Seymour, Booker T. Shelton, Cornell Shelton, III, J. Shelton, J. Spikes, Takeo Spizzirri, Esq., Paul M. C-8 of 9
Case: 10-10683
Page: 10 of 84
William Perkins v. Haines, et al; Docket No. 10-10683 Star 6 Investments, Ltd. Steele, Algernon O. Stein, Esq., Grant T. Stine, Esq., Kevin Tarabadkar, Dr., Sanjiwan TBC Capital, Inc. Thompkins, Karen Tillett, Colleen H., former counsel to William F. Perkins, Plan Trustee Treace, R. Jeneane Trigg, Esq., Mark G. U.S. Securities and Exchange Commission Wang, Ben Chang Whonder, Ernest Williams, Chasta N. Williams-Cochrane, Rodney Williamson, J. Robert Wilson, Craig A. & Carole Wisneski, David Withers, Bruce & Renee Work, Frederick T. Worthy-Pickett, Cheryl X-Spurts Investment C-9 of 9
Case: 10-10683
Page: 11 of 84
STATEMENT REGARDING ORAL ARGUMENT Appellant William F. Perkins, Plan Trustee, respectfully requests oral argument. As grounds for his request, Appellant states that his appeal is not frivolous, the dispositive issues in this appeal have not been authoritatively decided, and Appellant respectfully asserts that oral argument will significantly aid this Court in its consideration of this appeal.
-i-
Case: 10-10683
Page: 12 of 84
TABLE OF CONTENTS CERTIFICATE OF INTERESTED PERSONS AND CORPORATE DISCLOSURE STATEMENT.......................................................................1 STATEMENT REGARDING ORAL ARGUMENT ...............................................i TABLE OF CONTENTS......................................................................................... ii TABLE OF CITATIONS ....................................................................................... iv STATEMENT OF JURISDICTION....................................................................... ix STATEMENT OF THE ISSUES..............................................................................1 STATEMENT OF THE CASE.................................................................................2 A. B. C. D. Preliminary Statement ..........................................................................2 Course of Proceedings and Disposition Below....................................3 Statement of the Relevant Facts ...........................................................6 Standard of Review ..............................................................................7
SUMMARY OF THE ARGUMENT .......................................................................7 ARGUMENT AND CITATIONS OF AUTHORITY ...........................................11 I. Fraudulent Transfer Claims and Defenses Generally: Repayment of an Antecedent or Present Debt is Deemed to be For Value, and Therefore is Shielded from Avoidance.........................................................13 A. The determination of value focuses on the specific value of the property exchanged in the transfer at issue: where the exchange was for a worthless equity interest, the exchange cannot be for value..........................................................................14
II.
Fraudulent Transfer Claims and Defenses in the Context of Fraudulent Investment Schemes: a Critical Analysis of the Historically Decided Cases .............................................................................................................16 A. The factual distinction in this case relative to the Claim2 cases is critical because of the fundamental manner in which the law distinguishes the treatment of equity from the treatment of debt. .....26 1. Rooted in American legal traditions are clear distinctions between equity interests and debt claims.................................26
-ii-
Case: 10-10683
Page: 13 of 84
2.
The clear distinctions between equity and debt are reinforced by the treatment of inter se debt claims as compared to the treatment of inter se equity positions ............31
B.
A single court has improperly extended the Claim2 reasoning to the facts at bar, misinterpreting the principles in Eby as actually supporting recharacterization of transfers in respect of equity instruments to be in satisfaction of debt claims, without any meaningful substantive analysis to undergird that conclusion ..........36 1. Neither the Ninth Circuit in AFI nor the Bankruptcy Court adequately analyzed the fundamental distinctions between debt and equity...........................................................42 Moreover, neither the Ninth Circuit in AFI nor the Bankruptcy Court adequately analyzed that the Claim2 analysis permits the full recognition and satisfaction of a tort claim that was never even asserted, let alone proven in a court of law, in contravention of all notions of due process and requirement of articulation of claims ...................46 (i) Transmutation without articulation contravenes Section 510(b) of the Bankruptcy Code, which reflects Congressional intent regarding recharacterization of claims...........................................50 Transmutation without Articulation contravenes Sections 1123 and 1129 of the Bankruptcy Code, which reflect Congressional intent to assure the ratable treatment of articulated claims of similarly situated parties ...............................................................53
2.
(ii)
3.
Finally, neither the Ninth Circuit in AFI nor the Bankruptcy Court analyzed that the retroactive recognition and satisfaction of a tort claim contravenes the operation of Section 548(c) of the Bankruptcy Code ........55
CONCLUSION.......................................................................................................57 CERTIFICATE OF COMPLIANCE......................................................................60 CERTIFICATE OF SERVICE ...............................................................................61
-iii-
Case: 10-10683
Page: 14 of 84
TABLE OF CITATIONS
Page(s) CASES
Adelphia Communications Corp. v. Rigas (In re Adelphia Communications Corp.), 323 B.R. 345 (Bankr. S.D.N.Y. 2005) ...................................................................................................................15 Alley v. Miramon, 614 F.2d 1372 (5th Cir. 1980) ............................................................................34 Begier v. IRS, 496 U.S. 53, 110 S.Ct. 2258, 110 L.Ed.2d 46 (1990) ........................................53 Boesky v. CX Partners, L.P., 1988 WL 42250 (Del. Ch. 1988) ........................................................................29 Cordes & Co. Financial Services, Inc. v. A.G. Edwards & Sons, Inc., 502 F.3d 91 (2d Cir. 2007) .................................................................................47 Crimmins & Peirce Co. v. Kidder Peabody Acceptance Corp., 282 Mass. 367, 185 N.E. 383, 88 A.L.R. 1122 (1933).......................................34 Donell v. Kowell, 533 F.3d 762 (9th Cir. 2008) ..................................................................22, 24, 25 Eby v. Ashley, 1 F.2d 971 (4th Cir. 1924), cert. denied, 266 U.S. 631, 45 S.Ct. 197, 69 L.Ed. 478 (1925)..........................................................................................passim Fraser v. Major League Soccer, L.L.C., 97 F. Supp 2d 130 (D. Mass. 2000)....................................................................33 Grymes v. Sanders, 93 U.S. 55, 23 L.Ed. 798 (1876).........................................................................47 Hayes v. Palm Seedlings Partners-A (In re Agricultural Research and Tech. Group, Inc.), 916 F.2d 528 (9th Cir. 1990) ..................................................................37, 38, 40
-iv-
Case: 10-10683
Page: 15 of 84
HBE Leasing Corp. v. Frank, 61 F.3d 1054 (2d Cir. 1995) ...............................................................................48 Hillman v. Hillman, 910 A.2d 262 (Del. Ch. 2006) ............................................................................33 In re AFI Holding, Inc., 525 F.3d 700 (9th Cir. 2008) .......................................................................passim In re Bayou Group, LLC, 362 B.R. 624 (Bankr. S.D.N.Y. 2007)................................................................47 In re Ben Franklin Hotel Assoc., 1998 WL 94808 (E.D. Pa. 1998) ........................................................................28 In re Charter Company, 44 B.R. 256 (Bankr. M.D. Fla. 1984) .................................................................28 In re Churchill Mortg. Inv. Corp., 256 B.R. 664 (Bankr. S.D.N.Y. 2000)..........................................................14, 15 In re Fin. Federated Title & Trust, Inc., 309 F.3d 1325 (11th Cir. 2002) ......................................................................7, 14 In re Geneva Steel Co., 281 F.3d 1173 (10th Cir. 2002) ..........................................................................26 In re Granite Partners, L.P., 208 B.R. 332 (Bankr. S.D.N.Y. 1997)..........................................................26, 27 In re Hedged-Investments Associates, Inc., 84 F.3d 1267 (10th Cir. 1996) ......................................................................28, 36 In re Jeffrey Bigelow Design Group, Inc., 956 F.2d 479 (4th Cir. 1992) ..............................................................................34 In re Lake States Commodities, Inc., 253 B.R. 866 (Bankr. N.D. Ill. 2000) ...........................................................48, 49 In re M & L Business Machine Co., 84 F.3d 1330 (10th Cir. 1996) ................................................................17, 22, 24
-v-
Case: 10-10683
Page: 16 of 84
In re Richards & Conover Steel, Co., 267 B.R. 602 (8th Cir. BAP 2001) .....................................................................14 In re Roco Corp., 701 F.2d 978 (1st Cir. 1983)...............................................................................15 In re Sentry Operating Co. of Texas, Inc., 264 B.R. 850 (Bankr. S.D. Tex. 2001) ...............................................................53 In re Terry Mfg. Co., Inc., 2007 WL 274319 (Bankr. M.D. Ala. 2007) .................................................42, 43 In re United Energy Corp., 944 F.2d 589 (9th Cir. 1991) .......................................................................passim In re USA Commercial Mortgage Co., 377 B.R. 608 (BAP 9th Cir. 2007) .....................................................................51 Jezarian v. Raichle (In re Stirling Homex Corp.), 579 F.2d 206 (2d Cir. 1978) ...............................51 Merrill v. Abbott (In re Independent Clearing House Co.), 77 B.R. 843 (D. Utah 1987)17, 22, 23, 56 Schafer v. Hammond, 456 F.2d 15 (10th Cir. 1972) ..............................................................................15 Scholes v. Ames, 850 F.Supp. 707 (N.D. Ill 1994)...................................................................36, 37 Scholes v. Lehmann, 56 F.3d 750 (7th Cir 1995) .................................................................................54 Slappey Drive Indus. Park v. United States, 561 F.2d 572 (5th Cir. 1977) ..............................................................................30 The Pepsi-Cola Bottling Co. of Salisbury, Md. v. Handy, 2000 WL 364199 (Del. Ch. 2000) ..........................................................16, 28, 35 Wolfensohn v. Madison Fund, Inc., 253 A.2d 72 (Del. 1969) .....................................................................................30
-vi-
Case: 10-10683
Page: 17 of 84
STATUTES 11 U.S.C. 101(5) and (12).....................................................................................27 11 U.S.C. 101(16) and (17)...................................................................................27 11 U.S.C. 501(a) ...................................................................................................28 11 U.S.C. 510(b) ............................................................................................passim 11 U.S.C. 548.................................................................................................passim 11 U.S.C. 1102(a) ...................................................................................................3 11 U.S.C. 1123(a)(4).............................................................................................53 11 U.S.C. 1129(b) .................................................................................................26 11 U.S.C. 1129(b)(1).............................................................................................53 28 U.S.C. 158(d)(2)(A) ....................................................................................... viii 28 U.S.C. 158(d)(2)(A)(i) and (iii) ..................................................................... viii Section 548(d)(2)(A) of the Bankruptcy Code ........................................................13 Sections 1123 and 1129 of the Bankruptcy Code....................................................52 Sections 1129(b) and 1123(a)(4) of the Bankruptcy Code......................................54 Bankruptcy Reform Act of 1978..............................................................................51 Chapter 11 of Title 11 of the United States Code (the Bankruptcy Code) ............3 DEL. CODE ANN. tit. 6, 17-601, 17-604, 18-503 .................................................33 DEL. CODE ANN. tit. 6, 17-607, 17-804, 18-607 .................................................28 DEL. CODE ANN. tit. 6, 17-607, 18-607.........................................................15, 35 O.C.G.A. 14-9-503, 14-9A-46, 14-11-407 ...................................................15, 35 O.C.G.A. 14-9A-46, 14-11-407, 14-2-1405(3) and (4) ......................................28 O.C.G.A. 14-11-403, 14-9-503, 14-9A-42(b) ....................................................33 -viiwww.floridalegalblog.org
Case: 10-10683
Page: 18 of 84
O.C.G.A. 18-2-73(a) .............................................................................................13 O.C.G.A. 18-2-78..............................................................................................4, 13 OTHER AUTHORITIES Bruce A. Markell, A New Perspective on Unfair Discrimination in Chapter 11, 72 Am. Bankr. L.J. 227 (1998).....................................................................53 Fed. R. Bankr. P. 7001(2), (8)..................................................................................48 Fed. R. Bankr. P. 7056 ...............................................................................................5
-viii-
Case: 10-10683
Page: 19 of 84
STATEMENT OF JURISDICTION This Court has jurisdiction of this appeal pursuant to 28 U.S.C. 158(d)(2)(A). Pursuant to 28 U.S.C. 158(d)(2)(A)(i) and (iii), the United States Bankruptcy Court for the Northern District of Georgia, Atlanta Division (the Bankruptcy Court), certified for direct appeal to this Court that certain Order entered by the Bankruptcy Court on December 1, 2009 Denying Trustees Motion for Partial Summary Judgment (the Order). Following the Bankruptcy Courts certification of the Order, acting in accordance with Fed. R. Bankr. P. 8001(f)(5) and Fed. R. App. P. 5, Appellant filed a petition for permission for direct appeal to this Court, which petition this Court granted by order dated February 17, 2010. Accordingly, by its authorizing the direct appeal from the Bankruptcy Courts Order, this Court has jurisdiction of this appeal.
-ix-
Case: 10-10683
Page: 20 of 84
STATEMENT OF THE ISSUES Whether an investor who invested as an equity holder in an enterprise (as opposed to being a claimholder holding a debt claim against the enterprise), which enterprise is later revealed to have been a fraudulent scheme, can establish that he or she tendered value to the transferor-enterprise in exchange for the cash transfer that the investor received from the enterprise prior to the discovery of the fraudulent scheme and its subsequent bankruptcy filing, and thereby establish a required element of the investors affirmative defense to a fraudulent transfer claim asserted by the bankruptcy trustee, assuming that, at the time of each subject transfer, the investor: (i) tendered to the enterprise the investors essentially worthless equity interest in the enterprise in exchange for the transfer; and (ii) held what a court would have found to be an unasserted claim against the enterprise based on fraudulent inducement that arose at the time the investor originally invested as an equity holder in the enterprise.
-1-
Case: 10-10683
Page: 21 of 84
STATEMENT OF THE CASE A. Preliminary Statement
The instant appeal concerns adversary proceedings that Appellant William F. Perkins, Plan Trustee (the Trustee) for International Management Associates, LLC, the substantively consolidated post-confirmation debtor (the Debtor or Debtors, or generally IMA1), filed against numerous persons who had invested as equity members and/or limited partners in the Debtors (the Investor Defendants) to avoid and recover transfers made to them during the prebankruptcy operation of the Debtors, on the basis that such transfers were actually and/or constructively fraudulent pursuant to 11 U.S.C. 548 and correlative state law fraudulent transfer statutes (the Investor Avoidance Actions). Through the filing of the Investor Avoidance Actions, the Trustee attempts to recover sums distributed by the Debtors to certain of their equity investors prior to the discovery that the Debtors were being operated as a fraudulent scheme, in order to distribute most equitably the limited assets of the scheme for the benefit of all the schemes defrauded investors.
By order dated April 27, 2008, the Bankruptcy Court consolidated all of the related debtors of International Management Associates, LLC into one substantively consolidated bankruptcy estate.
-2-
Case: 10-10683
Page: 22 of 84
With the advice of the Plan Committee (the Committee),2 as duly formed pursuant to the confirmed Third Amended Trustees Plan of Liquidation (the Plan of Liquidation), the Trustee submits this brief (the Brief) in support of the Trustees appeal from that certain Order Denying Trustees Motion for Partial Summary Judgment entered on December 1, 2009 (the Order) by the United States Bankruptcy Court for the Northern District of Georgia, Atlanta Division (the Bankruptcy Court). B. Course of Proceedings and Disposition Below
On March 16, 2006 (the Petition Date), the Debtors each filed voluntary petitions for relief under Chapter 11 of Title 11 of the United States Code (the Bankruptcy Code). On March 27, 2006, the United States Trustee appointed a committee of investors pursuant to 11 U.S.C. 1102(a). On April 20, 2006, the United States Trustee appointed William F. Perkins as chapter 11 trustee of the Debtors. On August 27, 2008, the Bankruptcy Court entered an Order Confirming the Trustees Plan of Liquidation. Pursuant to the terms of the Plan of Liquidation, William F. Perkins was appointed as the Plan Trustee for the substantively consolidated Debtor, and the Plan Committee was duly formed.
Counsel for the Committee has prepared this Brief. By agreement with the Trustee, Committee counsel will take the lead role in arguing the matters raised herein.
-3-
Case: 10-10683
Page: 23 of 84
In order to distribute most equitably the limited assets of the IMA scheme for the benefit of all the schemes defrauded investors, the Trustee filed the Investor Avoidance Actions to avoid and recover transfers made to the Investor Defendants, on the basis that such transfers were actually and/or constructively fraudulent. In response, the Investor Defendants asserted the affirmative defense provided by Section 548(c) of the Bankruptcy Code and correlative provisions of state law fraudulent transfer statutes. Specifically, Section 548(c) of the
Bankruptcy Code provides that a transferee that takes for value and in good faith ... may retain any interest transferred ... to the extent that such transferee gave value to the debtor in exchange for such transfer. 11 U.S.C. 548(c) (emphasis added). Under applicable state law, [a] transfer is not voidable against a person who took in good faith and for a reasonably equivalent value. O.C.G.A. 18-2-78 (emphasis added). Thus, the Bankruptcy Code and state law afford an affirmative defense to a fraudulent transfer only where the defendant transferee can establish both that the transferee acted in good faith and that the transferee provided the transferor value in exchange for the transfer. See, e.g., id.; 11 U.S.C. 548(c). Because the Bankruptcy Code and state law require proof of an exchange for value, necessarily a transferees showing of good faith alone is insufficient to premise an affirmative defense to avoidance of the transfer. Accordingly, unless the Investor Defendants can establish that they provided the
-4-
Case: 10-10683
Page: 24 of 84
Debtors value in exchange for the transfers made to them, such transfers should properly be avoided even if the Investor Defendants can show that they acted in good faith. Pursuant to Rule 7056 of the Federal Rules of Bankruptcy Procedure, the Trustee filed a motion (the Motion for Partial Summary Judgment) seeking a ruling by the Bankruptcy Court that, as a matter of law, the Investor Defendants cannot meet their burden to establish the necessary value element of their affirmative defense on the basis that the distributions to the Investor Defendants were not transfers for value where such distributions were made solely in exchange for the Investor Defendants tendering back to the transferor Debtors the Investor Defendants essentially worthless equity interests in one or more of the Debtors. Doc 4, Pgs 1-2. Solely for purposes of considering the Motion for Partial Summary Judgment, the Bankruptcy Court consolidated the Trustees adversary proceedings against the Investor Defendants into a single Miscellaneous Proceeding.3 Doc 1, Pgs 1-3. On December 1, 2009, the Bankruptcy Court entered an Order denying the Trustees Motion for Partial Summary Judgment, and certified the legal question presented therein for immediate review by this Court. Doc 38, Pg 13. The Trustee then filed a Petition for Leave to Appeal from the
3
Miscellaneous Proceeding No. 09-MP-601, United States Bankruptcy Court for the Northern District of Georgia.
-5-
Case: 10-10683
Page: 25 of 84
Bankruptcy Courts Order, which petition this Court granted by order dated February 17, 2010. C. Statement of the Relevant Facts
As set forth in the Bankruptcy Courts Order and certification for direct appeal, for the purposes of this appeal it is assumed that the following facts have been established: Kirk Wright formed the Debtors purportedly to manage and operate as hedge funds, each of which was structured either as a limited liability company or a limited partnership. In reality, Wright used the Debtors at all material times to operate a fraudulent Ponzi scheme whereby capital contributions made into the Debtors by later equity investors were used to knowingly pay earlier investors more than their equity investments were actually worth, including nonexistent principal and fictitious profits, to perpetuate the illusion that the Debtors had positive investment gains, to keep existing investors from seeking recovery of their equity investments, and to induce prospective investors to make new equity investments. Each of the Investor Defendants made a capital contribution through execution of a limited liability company agreement, a limited partnership agreement, and/or a subscription agreement with one or more of the Debtors such that the Investor Defendant held an equity interest in, not a debt claim against, one or more of the Debtors denominated as a membership unit or a limited partnership interest. During the operation of the scheme, investors
-6-
Case: 10-10683
Page: 26 of 84
requested and received transfers from the Debtors, representing returns of principal and/or purported profits on their equity investments. At some time during the operation of the scheme, each Investor Defendant received one or more transfers of property from one or more of the Debtors on account of such Investor Defendants equity interest in one or more of the Debtors. Doc 39, Pgs 2-3. D. Standard of Review
The facts set forth above are presumed to have been established for purposes of the Bankruptcy Courts Order and this appeal; accordingly, the only issues on appeal involve the legal conclusions to be reached upon application of the law to the assumed facts. Appellant respectfully asserts that the Bankruptcy Court erred in formulating and applying the rule of law applicable to these facts. This Court reviews the legal conclusions of the lower courts de novo. In re Fin. Federated Title & Trust, Inc., 309 F.3d 1325, 1328-29 (11th Cir. 2002). SUMMARY OF THE ARGUMENT The issue on appeal is whether an Investor Defendant, as a holder of an equity interest in a Debtor (as opposed to being a claimholder holding a debt claim against a Debtor) can establish that the Investor Defendant tendered value to the transferor-Debtor in exchange for the cash transfer that the Investor Defendant received from the Debtor, and thereby establish a required element of the Investor Defendants affirmative defense to the Trustees fraudulent transfer claims,
-7-
Case: 10-10683
Page: 27 of 84
assuming that, at the time of each subject transfer the Investor Defendant: (i) tendered to the Debtor the Investor Defendants essentially worthless equity interest in the Debtor in exchange for the transfer; and (ii) held what a court would have found to be an unasserted claim against the Debtor based on fraudulent inducement that arose at the time the Investor Defendant originally invested as an equity holder in the Debtor. Courts universally recognize that (i) equity interests in an enterprise with little or no net worth are essentially worthless, and (ii) where the equity interests of an enterprise are worthless or of a value substantially below the amounts distributed to the enterprises equity investors, those distributions are not exchanges for value within the meaning of the Bankruptcy Code or state law. Meanwhile, there also has arisen a general rule in the fraudulent investment scheme context that defrauded investors who recovered their investments from a fraudulent enterprise prior to the frauds discovery are entitled to retain all of what they recovered up to the full amount of the principal they invested, based on a legal fiction whereby payments made to the schemes victims in respect of their principal investments are retroactively recharacterized as having been paid to satisfy unasserted fraudulent inducement claims -- i.e., unknown to the investor at the time of redemption -- that arose when the investor initially invested in the scheme. This general rule, however, arose in the factual context where the
-8-
Case: 10-10683
Page: 28 of 84
defrauded investors held from their inception debt claims against the fraudulent investment scheme, as compared to the case at bar where the defrauded investors were, at the very inception of their investments, clearly holders of equity interests in the fraudulent enterprise. Despite the well-established law that the exchange of a worthless equity interest is not an exchange for value, and without any analysis of the clear distinctions that exist between equity and debt (and how legal fundamentals govern the treatment of equity and debt in materially distinct ways), at least one court has extended the general rule that arose in cases where the defrauded investors held original debt claims against the fraudulent investment scheme and applied that general rule to the factual circumstances found in the case at bar where the defrauded investors were, at the very inception of their investments, clearly equity holders in the fraudulent enterprise. Though technically not bound by the reasoning of that decision, and notwithstanding the fact that the Bankruptcy Court agreed that the relief sought by the Trustee arguably represents a more equitable result and should apply in all Ponzi scheme cases, the Bankruptcy Court apparently felt constrained by the seeming weight of the general rule, and denied the Trustees Motion for Partial Summary Judgment. Doc 38, Pg 13. Reasoning that [t]he substance, not the form, of the [investment] transactions properly governs, and that the general rule
-9-
Case: 10-10683
Page: 29 of 84
that a Ponzi victim has a fraud claim, the satisfaction of which to the extent of repayment of principal constitutes value in exchange for the transfer, applies regardless of whether the investment, in form, is debt or equity, the Bankruptcy Court concluded that no sound basis exists for creating a different rule [than the general rule] based on the equity nature of the fraudulently induced investments. Doc 38, Pgs 12-13. The Trustee respectfully disagrees with the Bankruptcy Courts reasoning. First, sufficient authority exists to mandate here a result different from the general rule, based on the fact that the Investor Defendants held equity interests in the Debtors, and given the universally accepted proposition that the exchange of the Investor Defendants worthless equity interests in the Debtors for the cash distributions that they received from the Debtors is not an exchange for value. Second, both the substance and the form of the transfers sought to be avoided here were in the nature of equity-based transfers, whereby cash was transferred in exchange for the Investor Defendants tendering to the Debtors their worthless equity interests. The law fundamentally distinguishes between debt and equity, and does not permit silent, automatic, retroactive recharacterization of distributions in respect of an equity position to be deemed to be in satisfaction of a debt claim. In the Bankruptcy Courts attempt to look beyond the equity form of the transaction, the Bankruptcy Court mistakenly disregarded the equity substance of
-10-
Case: 10-10683
Page: 30 of 84
the transaction, and wholly failed to consider the myriad fundamental legal considerations that govern the treatment of equity investments. Despite the seeming appeal of leaving those who were fortunate enough to avoid losses to the Ponzi scheme free from claims to recover the distributions that they received, the proper application of both state and bankruptcy law relating to the rights of equity holders requires that such fraudulent distributions be avoided so that other equity investors in the Ponzi scheme can likewise share in the avoidance proceeds so that, as close as possible, all equity investor victims of the scheme can recover on a ratable basis their investment in the fraudulent enterprise. Such a result in especially compelling and warranted in this case because the parties who would most benefit from such a ratable distribution are the very parties whose investments actually funded the distributions the Trustee seeks to avoid. ARGUMENT AND CITATIONS OF AUTHORITY At its essence, the legal issue before this Court involves a moral dilemma not solvable by equitable principles alone because, no matter the remedy fashioned, some significant proportion of the parties affected will protest the outcome as patently unfair based on their particular factual circumstances and resultant perspective on the matters at bar. In the absence of one undeniably correct answer, courts must look to the law to fashion relief most equitable to all parties. Looking to the law of fraudulent transfers in the Ponzi scheme context,
-11-
Case: 10-10683
Page: 31 of 84
there exists a well-established line of decisional authority that seemingly comes to bear on the facts of this case; however, there is at least one critical factual distinction between the cases in that line of authority and the case at bar -- namely, as further detailed below, those cases involved investors who held claims against the fraudulent scheme in which they invested, whereas the instant case involves investors who held equity interests in the fraudulent scheme in which they invested, and affirmatively exchanged such equity interests for the distributions received from the scheme. Naturally, the question is why that distinction matters, and why this Court should not simply apply the line of decisional authority that arose in the context of original debt-based investment claims to the facts at bar? The answer lies in the fundamental distinctions in the manner in which the law treats debt-based claims as compared to how the law treats equity interests. The Trustee will show this Court how, when the law is appropriately applied to the assumed facts at bar, it is fundamentally inappropriate to extend the reasoning found in the cases involving original debt-based investment claims to this case. The Trustee will further show why the one court that extended such reasoning to facts similar to the instant case erred in its reasoning, which reasoning was utterly devoid of any meaningful analysis of the fundamental legal distinctions applicable to the treatment of debt-based claims versus equity interests, and accordingly, why
-12-
Case: 10-10683
Page: 32 of 84
the Bankruptcy Court erred when it relied on the reasoning from that case to deny the Trustees Motion for Partial Summary Judgment. I. Fraudulent Transfer Claims and Defenses Generally: Repayment of an Antecedent or Present Debt is Deemed to be For Value, and Therefore is Shielded from Avoidance. As set forth above, pursuant to 11 U.S.C. 548 and correlative state law fraudulent transfer statutes, the Trustee filed claims against the Investor Defendants to avoid and recover transfers made to them during the pre-bankruptcy operation of the Debtors, on the basis that such transfers were actually and/or constructively fraudulent. The Investor Defendants have asserted the affirmative defense provided by Section 548(c) of the Bankruptcy Code and correlative state law provisions. Section 548(c) of the Bankruptcy Code provides that a transferee that takes for value and in good faith ... may retain any interest transferred ... to the extent that such transferee gave value to the debtor in exchange for such transfer. State fraudulent conveyance law operates to the same effect. See, e.g., O.C.G.A. 18-2-78. Section 548(d)(2)(A) of the Bankruptcy Code defines
value as property, or satisfaction or securing of a present or antecedent debt of the debtor. Similarly, under state law, [v]alue is given for a transfer or an obligation if, in exchange for the transfer or obligation, property is transferred or an antecedent debt is secured or satisfied. O.C.G.A. 18-2-73(a). Thus, where what originally was a loan or a contractual agreement giving rise to a claim in an
-13-
Case: 10-10683
Page: 33 of 84
undisputed amount, its repayment is deemed by clear statutory language to have been a payment for value, and in that context, no further inquiry into whether the transfer was reasonably equivalent is necessary. Simply stated, generally the
repayment of an undisputed claim outside a statutorily based preference period is insulated, and even if the repayment arises where the transferor is found to have engaged in a fraudulent transfer, the transferee may keep the repayment provided that the transferee received the payment in good faith. A. The determination of value focuses on the specific value of the property exchanged in the transfer at issue: where the exchange was for a worthless equity interest, the exchange cannot be for value.
The determination of whether value was provided to the transferor under Section 548 of the Bankruptcy Code and state law fraudulent conveyance statutes focuses on the value of the specific property provided by the transferee to the transferor in exchange for the subject transfer. See, e.g., In re Financial Federated Title & Trust, Inc., 309 F.3d 1325, 1332 (11th Cir. 2002). Courts reason that a transfer was for value if what was transferred in exchange was the reasonable equivalent of what was received. See, e.g., In re Richards & Conover Steel, Co., 267 B.R. 602, 612 (8th Cir. BAP 2001). The United States Bankruptcy Court for the Southern District of New York, in In re Churchill Mortg. Inv. Corp., 256 B.R. 664 (Bankr. S.D.N.Y. 2000), analyzed state and bankruptcy fraudulent conveyance statutes in the context of a fraudulent investment scheme, stating, The statutes are -14www.floridalegalblog.org
Case: 10-10683
Page: 34 of 84
quite clear. The focus of the inquiry is the specific transaction the trustee seeks to avoid, i.e., the quid pro quo exchange between the debtor and transferee, rather than an analysis of the transaction's overall value to a debtor as it relates to the welfare of the debtor's business. Id. at 678. Accordingly, where the transfer is a distribution in respect of an equity interest, the transfer must be supported by the fair valuation of the equity interest tendered in exchange for the distribution at the time the distribution was made. Courts recognize the basic proposition that equity interests of an insolvent company have no value. See, e.g., Adelphia Communications Corp. v. Rigas (In re Adelphia Communications Corp.), 323 B.R. 345, 377 (Bankr. S.D.N.Y. 2005) (citing Pereira v. Equitable Life Ins. Society (In re Trace Int'l Holdings, Inc.), 289 B.R. 548, 560-61 (Bankr. S.D.N.Y. 2003). Thus, courts uniformly conclude that when an equity holder redeems his shares in what, at the time of the transfer, was an insolvent company, the equity holder failed to supply reasonably equivalent value to the transferor in exchange for the transfer. See, e.g., id.; In re Roco Corp., 701 F.2d 978, 982 (1st Cir. 1983); Schafer v. Hammond, 456 F.2d 15, 17-18 (10th Cir. 1972). By these principles, distributions to equity holders of an insolvent entity are contrary to basic limited liability company and partnership law provisions. See, e.g., O.C.G.A. 14-9-503, 14-9A-46, 14-11-407; DEL. CODE
-15-
Case: 10-10683
Page: 35 of 84
ANN. tit. 6, 17-607, 18-607; The Pepsi-Cola Bottling Co. of Salisbury, Md. v. Handy, 2000 WL 364199, pp. 4-5 (Del. Ch. 2000). II. Fraudulent Transfer Claims and Defenses in the Context of Fraudulent Investment Schemes: a Critical Analysis of the Historically Decided Cases. The standards set forth above applicable to fraudulent transfer cases generally also apply to determine whether distributions from fraudulent investment schemes may be avoided. In the wake of typical Ponzi scheme cases, courts routinely examine fraudulent transfer claims and their correlative defenses in the context of a trustee seeking to avoid and recover fraudulent distributions from the scheme. Often cited as having provided the seminal analysis in the area of
fraudulent transfer recoveries in the context of a fraudulent investment scheme is Eby v. Ashley, 1 F.2d 971 (4th Cir. 1924), cert. denied, 266 U.S. 631, 45 S.Ct. 197, 69 L.Ed. 478 (1925), in which the United States Court of Appeals for the Fourth Circuit reasoned that, from the moment an investor was deceived into investing in a fraudulent scheme, that investor held a fraud claim against the scheme in an amount equal to his investment. Id. at 973. Citing this reasoning from Eby, many courts since have shielded defrauded recovering investors from claims asserted against them seeking to avoid transfers they received in respect of their original principal investments, reasoning that any transfer to defrauded investors up to the amount of their principal investment was an exchange for value on the basis that
-16-
Case: 10-10683
Page: 36 of 84
the transfer was made in exchange for the investors fraud claim that arose at the moment of his investment (or more appropriately, should retroactively and automatically be deemed to have been made in exchange for the investors fraud claim that arose at the moment of his investment). See, e.g., Merrill v. Abbott (In re Independent Clearing House Co.), 77 B.R. 843, 857 (D. Utah 1987); In re M & L Business Machine Co., 84 F.3d 1330, 1340-41 (10th Cir. 1996); In re United Energy Corp., 944 F.2d 589, 596 (9th Cir. 1991). The Trustee does not contest the analysis that a fraudulent inducement claim arose at the time the defrauded investor made his investment into the scheme. In fact, the Trustee agrees that each Investor Defendant likely possessed a fraudulent inducement claim arising as of the date upon which each investor was induced to invest in the scheme, which claim could have been asserted at the time each Investor Defendant redeemed his investment. Moreover, the Trustee does not even contest the ultimate result in Eby (or in the cases cited above that follow Eby, its progeny) that the transfers to those recovering investors -- who were holders of debt claims from the outset -- were deemed to be exchanges for value. However, the Trustee absolutely contests (i) any argument that the reasoning of those cases requires that the distributions to the recovering investors in fact be retroactively deemed to have been in affirmative satisfaction of the latent fraud claims held by the recovering investors, and (ii) the extension of the reasoning from those cases to
-17-
Case: 10-10683
Page: 37 of 84
the case at bar, considering that each of those cases was decided in the factual context of recovering investors who held original debt-based claims against the Ponzi scheme, and by contrast, the recovering investors in the instant case held original equity-based interests in the Ponzi scheme, a factual distinction necessitating a fundamentally different legal analysis. Despite the apparent perception that the reasoning in Eby stands for the proposition that, for purposes of a value exchange analysis, an investors original investment is transmuted into a claim based on an unasserted fraud claim, that rationale was neither necessary to Ebys holding nor found by the court in Eby. Actually, Eby (and later its progeny) simply acknowledged the existence of two separate and distinct bases for claims against the scheme -- one based on the initial nature of the investment that gave rise to a right of repayment, and the other on account of the investors fraudulent inducement claim. Looking to the facts in Eby, those investors held claims against the scheme from the outset. In exchange for sums that investors paid into the scheme, the operator issued to each investor a receipt providing: (i) that the sums were to be placed in an account managed by the operator, (ii) the sums were credited to the investor, and (iii) the investor had the right to withdraw any or all of the investors account on thirty days written notice. Id. at 971. Settlements to the investors were to be made monthly, and with each settlement a new receipt issued showing
-18-
Case: 10-10683
Page: 38 of 84
the investors new investment amount for the next thirty days -- effectively a new relationship began each month and ended thirty days later. Id. at 972. Thus, there is no evidence in Eby that the investors were equity holders in the scheme, but rather they were clearly claimants against the scheme. In fact, the Eby court specifically referred to the obligation of the scheme to its investors as a debt equal to the amount each investor invested into the scheme. Id. at 973. According to those investment terms, an investor, Ashley, deposited $3,000 into the scheme. Over a period of approximately two years, Ashley received $1,576 in payments from the scheme as a return on his investment (i.e., profit), then Ashley requested and received the return of his original $3,000 investment. The bankruptcy trustee sued Ashley for return of the entire $4,576 in transfers that Ashley received from the scheme, on the basis that payment of the $1,576 was a fraudulent transfer of false profits, and that the repayment of his $3,000 principal investment was an unlawful preference. Id. at 971-72. In dicta, at least with respect to any fraudulent transfer analysis, the Eby court reasoned that Ashley had the right to recover from the scheme his entire $3,000 investment from the moment he was deceived into investing, presuming that he acted in good faith. Id. at 973. The court then reasoned that the schemes debt owed to Ashley was reduced by the transfers to him, and that the primary inquiry was whether the payment
-19-
Case: 10-10683
Page: 39 of 84
constituted an unlawful preference of one creditor over another. Id. (emphasis added). Accordingly, the Eby court clearly and specifically contemplated the existence of two different claims by the investor -- one debt claim that arose from the initial investment in the scheme, and another fraudulent inducement claim that arose as a result of the fraud. Id. at 973. Accordingly, when the recovering investors in Eby redeemed their investments, by their affirmative exchange of their legitimate, original antecedent debt claims against the scheme based on their investments, unquestionably there was an exchange for value for purposes of a fraudulent transfer analysis. The existence of another claim based on a latent fraud claim in Eby in no way affects the ultimate outcome of the value exchange analysis, given that the exchange was already fully for value based on the redemption of the legitimate debt-based investment claim. Therefore, Eby did not require that the distributions to the recovering investors in fact be retroactively deemed to have been in affirmative satisfaction of the latent fraud claims held by recovering investors. Fairly assessed, although some courts have misinterpreted it, Eby merely contains non-controversial reasoning allowing a claimant to recover the principal amount that was initially invested in the scheme where the investor had a right to repayment -- a claim from the outset -- while recognizing the
-20-
Case: 10-10683
Page: 40 of 84
existence of an alternate basis on which to assert an extant, though unasserted, antecedent debt claim. As noted, the Trustee does not contest the existence of a defrauded investors latent fraud claim, or even the recognition of such claim in an initially debt-based investment case, because the recognition of such an additional claim simply has no effect on the ultimate outcome of the value exchange analysis where the original investment already gave rise to a claim, pursuant to which the value exchange analysis was already satisfied. As such, for purposes of a
value exchange analysis, the dual-prong claim reasoning in Eby that a fraudulent inducement claim provides a separate basis on which to establish a claim by the transferee against the transferor must be recognized as surplusage. It adds nothing, as the transferee had a claim at the inception of his investment based on his investment contract claim, and his receipt of repayment as such was, ipso facto, for value. (This dual basis for a claim scenario evidenced by Eby and its progeny will be examined in numerous instances herein below, juxtaposed against situations, such as are present in the case sub judice, where the investment initially was in the nature of the acquisition of an equity interest. For simplicity of
reference, the reasoning where the initial investment gave rise to a claim, and where the fraudulent inducement argument simply affords a separate, independent
-21-
Case: 10-10683
Page: 41 of 84
and redundant basis for a claim, will be referred to below from time to time as the claim squared -- Claim2 -- concept.) Naturally, the Investor Defendants have cited to Eby and its progeny for the proposition that investors should be shielded from claims asserted against them seeking to avoid transfers in respect of their original principal investments. See, e.g., Merrill v. Abbott (In re Independent Clearing House Co.), 77 B.R. 843 (D. Utah 1987); In re M & L Business Machine Co., 84 F.3d 1330 (10th Cir. 1996); In re United Energy Corp., 944 F.2d 589 (9th Cir. 1991); Donell v. Kowell, 533 F.3d 762 (9th Cir. 2008). Doc 23, Pgs 9-20. When critically examined, however, each of these decisions cited by the Investor Defendants essentially just followed the Claim2 concept originated in Eby, and reasoned that distributions made in satisfaction of one debt claim could also be in satisfaction of another distinct basis for a debt claim by the same party arising from the same transaction. In each of those cases, the defrauded investors clearly maintained a debt relationship with the Ponzi scheme from the outset; thus, while each of those cases recognized an alternate antecedent debt claim for purposes of satisfying a value exchange analysis, none of those cases in any way addressed factual circumstances found in the instant case where the original investments were in the nature of equity interests.
-22-
Case: 10-10683
Page: 42 of 84
The Trustee will address each of the primary cases cited by the Investor Defendants in turn, and will show that none of these cases can be appropriately cited as support for the extension of the Claim2 reasoning to the case at bar. Cited by the Investor Defendants, and often cited by courts in Ebys line of reasoning as protecting the return of principal to Ponzi scheme investors, is Merrill v. Abbott (In re Independent Clearing House Co.), 77 B.R. 843 (D. Utah 1987). Independent Clearing House explicitly followed Eby, and reasoned that the Bankruptcy Codes definition of debt is sufficiently broad to cover the obligation of the fraudulent investment enterprise to return a defrauded investors paid-in principal amounts on the basis of the investors latent fraud claim. Id. at 857. Importantly, in
Independent Clearing House however, the defrauded investors were denominated as undertakers who signed debt-based contracts committing their invested sum for a specific period of time, after which the sum was to be repaid to the investor. Id. at 848. Hence, like in Eby, any reasoning by the Independent Clearing House court that transfers to investors satisfied antecedent debt claims based on their latent fraud claims against the fraudulent enterprise simply characterized payment in respect of the original antecedent debt obligation to also be in payment of the same amount based upon a separate theory to premise a claim -- the schemes inducing fraud. Simply put, Independent Clearing House is a Claim2 case.
-23-
Case: 10-10683
Page: 43 of 84
Similarly, in In re M & L Business Machine Co., another case in Ebys line, the defrauded investors were holders of debt-based promissory notes promising specific returns over specific periods. 84 F.3d at 1332. While the M & L court may have reasoned that the passive, retroactive recognition of previously unasserted fraud claims can support the value analysis in the Claim2 context, the court never explored whether unasserted fraud claims can be the basis for the recharacterization of a transfer made in respect to what was originally an equity investment as having been made in respect to the payment of a fraud-based debt claim. Therefore, this Court should refuse to accept M & L as support for the extension of the Claim2 reasoning to the instant case, wherein the Investor Defendants seek to apply the conventional debt-based reasoning to equity transfers. The recent decision by the United States Court of Appeals for the Ninth Circuit in Donell v. Kowell, 533 F.3d 762 (9th Cir. 2008) follows in this line of Claim2 cases, as the investors therein were holders of promissory notes with a three-month maturity period, guaranteed a twenty percent return during that period. Id. at 767. Like in Eby, any conclusion in Donell that distributions from the Ponzi scheme up to the value of the initial investment are to be considered as exchanges for reasonably equivalent value (because they proportionally reduce the investors' rights to restitution) was surplusage because, independent of whether the repayment reduced the investors fraud-restitution claim, the investors held
-24-
Case: 10-10683
Page: 44 of 84
antecedent debt claims to begin with. As such, the investors could retain the amounts repaid regardless of whether they had fraud claims, because under Section 548(c) and state law, an antecedent debt holder is deemed to have given value up to the principal invested as a claim. Thus, no reasonably equivalent value test needs to be separately satisfied in a Claim2 circumstance, like Donell, to justify the repayment of a principal claim. Likewise, the Ninth Circuit case, In re United Energy Corp., 944 F.2d 589 (9th Cir. 1991), involved factual circumstances where defrauded investors were debt holders from the outset, having been promised contractual payments in connection with the purchase of items of equipment. 944 F.2d at 590. Like the foregoing cases relied upon by the Investor Defendants, United Energy neither addressed nor in any way involved the recharacterization of a transfer made in respect of what was originally an equity investment as having been made in respect of the payment of a fraud-based debt claim. Thus, this Court should deem such cases inapposite to the case at bar, as Eby and its progeny clearly do not stand for the proposition that transfers made to investors can legitimately and fairly be recharacterized from transfers in respect of a equity interests into transfers made in respect of unarticulated fraud-based debt claims.
-25-
Case: 10-10683
Page: 45 of 84
A.
The factual distinction in this case relative to the Claim2 cases is critical because of the fundamental manner in which the law distinguishes the treatment of equity from the treatment of debt.
To fully examine the importance of the factual distinctions of this case from the historically decided Ponzi scheme cases, it is appropriate to view the instant case against the backdrop both of well-established legal distinctions that exist in the recognition and treatment of debt relative to equity, as well as legal distinctions that exist between how debt holders are treated relative to similarly situated debt holders as compared to how equity holders are treated relative to similarly situated equity holders. 1. Rooted in American legal traditions are clear distinctions between equity interests and debt claims.
Equity holders and debt holders have materially dissimilar expectations and rights, accepting insolvency risk and the potential for upside prosperity to a significantly different degree. See In re Granite Partners, L.P., 208 B.R. 332, 336 (Bankr. S.D.N.Y. 1997). The absolute priority rule, codified in 11 U.S.C. 1129(b), reflects the allocation of the risk among equity holders and debt holders. Id. The Tenth Circuit has recognized the tension between equity and debt in the bankruptcy context, and the transmutation from one to the other, stating, When a corporation becomes bankrupt, the temptation to lay aside the garb of a shareholder, on one pretense or another, and to assume the role of a creditor, is very strong, and all attempts of that kind should be viewed with suspicion. In re -26www.floridalegalblog.org
Case: 10-10683
Page: 46 of 84
Geneva Steel Co., 281 F.3d 1173 (10th Cir. 2002) (citing Jezarian v. Raichle (In re Stirling Homex Corp.), 579 F.2d 206, 213 (2d Cir. 1978)). Moreover, even if equity holders successfully transmute their positions into fraud claims, such claims cannot be treated equally with the claims of debt holders, because doing so would improperly reallocate risk to debt holders who relied on the equity cushion in extending credit. Granite Partners, 208 B.R. at 336; 11 U.S.C. 510(b)
(discussed infra sec. II.(B)(2)(ii)). The Bankruptcy Code is crafted to provide clear definitional distinctions between equity and debt. The Bankruptcy Code defines equity security holder as the holder of an equity security of the debtor, and equity security as (A) share in a corporation, whether or not transferable or denominated stock, or similar security; (B) interest of a limited partner in a limited partnership; or (C) warrant or right, other than a right to convert, to purchase, to sell, or subscribe, to a share, security, or interest of a kind specified in subparagraph (A) or (B) of this paragraph. 11 U.S.C. 101(16) and (17). The Bankruptcy Code defines debt as liability on a claim, and claim as (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 (B) right to an equitable remedy for breach of performance if such breach gives rise to a right of payment . 11 U.S.C. 101(5) and (12). The Bankruptcy Code
-27-
Case: 10-10683
Page: 47 of 84
further distinguishes debt from equity by the manner in which holders assert such positions, requiring debt holders to file proofs of claim while equity holders are to file proofs of interest. See 11 U.S.C. 501(a); In re Charter Company, 44 B.R. 256, 258 (Bankr. M.D. Fla. 1984). Courts have recognized this obvious distinction, reasoning, An ownership interest is not a debt of the partnership. Partners own the partnership subject to the profits or losses. Creditors, however, hold claims regardless of the performance of the partnership business. Thus, an ownership interest is not a claim against the partnership. In re Ben Franklin Hotel Assoc., 1998 WL 94808, *2 (E.D. Pa. 1998) (quoting In re Riverside-Linden Investment Co., 925 F.2d 320, 323 (9th Cir. 1991)); see also In re Hedged-Investments Associates, Inc., 84 F.3d 1267, 1272 (10th Cir. 1996) (finding that a limited partner Ponzi scheme investor could not be considered a creditor solely on the basis of his equity investment in the partnership). Moreover, contemporary state law statutes governing limited liability companies and limited partnerships clearly distinguish between equity and debt, requiring that holders of debt instruments have priority rights over equity holders with regard to distribution of corporate assets. See, e.g., O.C.G.A. 14-9A-46, 14-11-407, 14-2-1405(3) and (4); DEL. CODE ANN. tit. 6, 17-607, 17-804, 18607; see also Handy, 2000 WL 364199 at pp. 4-5 (indicating that one of the primary purposes of section 18-607 of the Delaware LLC Act is to enable creditors
-28-
Case: 10-10683
Page: 48 of 84
of a limited liability company to be remunerated before company members receive distributions, which purpose prevents members from stripping the company of corporate assets and rendering the company insolvent); Boesky v. CX Partners, L.P., 1988 WL 42250, p. 2 (Del. Ch. 1988) (noting that, in accordance with section 17-804 of the Delaware Revised Uniform Limited Partnership Act, the duties of a limited partnerships liquidating partner is to gather the company assets, pay off creditor claims and distribute any remaining funds to the companys equity holders). Given the existence of such essential, irrefutable distinctions between debt and equity, courts cannot simply dismiss the form of the instruments at issue in any case, but rather must give due consideration to the legal implications created by the relevant documents. Because of the fundamental distinctions between debt
positions and equity interests, and the resultant distinctions in any analysis regarding distributions in respect of an equity interest versus a debt claim, courts routinely are tasked to examine and interpret whether a particular instrument creates an equity or debt relationship between an enterprise and the holders of the subject instrument. In so doing, courts consider: (1) the name given to the
instrument; (2) the intent of the parties; (3) the presence or absence of a fixed maturity date; (4) the right to enforce payment of principal and interest; (5) the presence or absence of voting rights; (6) the status of the contribution in relation to
-29-
Case: 10-10683
Page: 49 of 84
regular corporate contributors; and (7) certainty of payment in the event of the corporation's insolvency or liquidation. See Wolfensohn v. Madison Fund, Inc., 253 A.2d 72, 75 (Del. 1969); Slappey Drive Indus. Park v. United States, 561 F.2d 572, 581-82 (5th Cir. 1977). In conducting this analysis, courts recognize that both the form and substance of the relationship between the entity and its parties in interest are vitally important with respect to the determination of the rights of those parties with respect to the entity. To disregard the form and substance of the relationship taken by the parties, in the name of equity or some similar basis, would improperly reduce that which the parties purposefully created into a nullity. If courts are so empowered, then agreements between parties are rendered meaningless, contrary to all notions of law. Here, each Debtor was a separate legal entity organized under state law, structured either as a limited partnership or a limited liability company. Doc 6, Pg 3. For purposes of the Bankruptcy Courts Order and this appeal, it is assumed that each Investor Defendant affirmatively executed a limited partnership agreement or limited liability company agreement with one or more of the Debtors.4 Doc 6, Pg
By the terms of such agreements, (i) Investor Defendants were granted limited partnership interests or membership units in one or more of the Debtors (Doc 6, Ex. C (Limited Partnership Agreement), Ex. E (Limited Partnership Subscription Agreement), Ex. G (Limited Partnership Confidential Private Offering Memorandum), Exhibit D (Limited Liability Company Agreement), Ex. F (Limited Liability Company Membership Agreement Form), Ex. H (Limited
(footnote continued on next page)
-30-
Case: 10-10683
Page: 50 of 84
3. Pursuant to their equity relationships created by these agreements, the Investor Defendants affirmatively exchanged their equity interests in one or more of the Debtors for the cash distributions they received from one or more of the Debtors. To ignore the legal form and substance of the Investor Defendants equity interests in the Debtors would be to ignore the form and substance of the relationship that the Investor Defendants knowingly and purposefully took in the Debtors, in which they shared in the value of the Debtors, both upside and downside. 2. The clear distinctions between equity and debt are reinforced by the treatment of inter se debt claims as compared to the treatment of inter se equity positions.
The legal principles set forth above address distinctions in the treatment of equity holders relative to debt holders. Just as important, however, are the legal
(footnote continued from previous page)
Liability Company Confidential Offering Memorandum); (ii) Investor Defendants made capital contributions into one or more of the Debtors, with no fixed maturity date for return of any paid-in capital (Doc 6, Exhibit C (Limited Partnership Agreement 5.01), Exhibit D (Limited Liability Company Agreement 8.1); (iii) Investor Defendants equity interests were valued in proportion to the value of the limited partnership or limited liability company in which they invested, subject to allocation of the net profits or losses of the respective Debtor (Doc 6, Exhibit C (Limited Partnership Agreement 6.01), Ex. G (Limited Partnership Confidential Private Offering Memorandum, p.7), Exhibit D (Limited Liability Company Agreement 4.2), Ex. H (Limited Liability Company Confidential Offering Memorandum, p.3); and (iv) distribution rights of Investor Defendants were subordinated to creditors upon liquidation (Doc 6, Pgs 3-4, Exhibit C (Limited Partnership Agreement 9.03), Exhibit D (Limited Liability Company Agreement 9.4).
-31-
Case: 10-10683
Page: 51 of 84
principles that dictate the distinctions in the treatment of debt holders relative to other similarly situated debt holders from the treatment of equity holders relative to other similarly situated equity holders. As further described below, whereas the claim of a holder of a legitimate debt against an enterprise may properly be paid prior to and in preference over other similarly situated debt holders, outside some statutory preference period, by contrast, state and bankruptcy law clearly mandate that no payment can ever be made to satisfy the interest of one equity holder over the interests of other similarly situated equity holders. This distinction exists because the value of any particular debt position is determined by the rights and privileges provided in the terms of the unique contract instrument between the entity and the debt holder; accordingly, the value of such debt holders claim does not depend in any way on the valuation of any claims of similarly situated debt holders. By contrast, the value of an equity interest is determined as a proportion of the value of the subject enterprise in which the holder has an ownership interest, which enterprise value is determined on some appropriate metric of EBITDA5 multiples or similar valuation algorithms. The proportionate value of any equity interest in the enterprise is determined in relation to other similarly situated equity holders in the enterprise; accordingly, distributions in respect of any equity interest
Earnings Before Interest Depreciation Taxes & Amortization.
-32-
Case: 10-10683
Page: 52 of 84
must be made in a ratable fashion among similarly situated equity holders, per contemporary state law statutes governing limited liability companies and limited partnerships that explicitly require that distributions to holders of equity instruments follow a highly constrained order. See O.C.G.A. 14-11-403, 14-9503, 14-9A-42(b); DEL. CODE ANN. tit. 6, 17-601, 17-604, 18-503; see also Hillman v. Hillman, 910 A.2d 262, 272-74 (Del. Ch. 2006) (a partner in a limited partnership is entitled to receive the ratable fair value of such partners partnership interest absent provisions in a partnership agreement specifying an alternative method of calculating distribution amounts); Fraser v. Major League Soccer, L.L.C., 97 F. Supp 2d 130, 134 (D. Mass. 2000) (members of an LLC share in overall company profits and losses ratably according to their investment or as otherwise provided by the organizing [a]greement). When applied to a fraudulent transfer analysis, these distinctions manifest to create materially different outcomes depending on whether the underlying transfer involved a debt claim or an equity interest. Looking first to the analysis applicable to the avoidance of a transfer in satisfaction of a debt claim, other than through a preference claim, there is no basis in law to challenge a transfer to the holder of a valid, undisputed debt where the transferee acted in good faith, given that an asset (such as cash) was used to satisfy a liability (an obligation) in an equal amount. Such a transfer does not in any way impair the rights of other debt holders because
-33-
Case: 10-10683
Page: 53 of 84
the transaction had no effect on the net assets and liabilities of the transferor. See In re Jeffrey Bigelow Design Group, Inc., 956 F.2d 479 (4th Cir. 1992) (when determining whether a transfer is avoidable, the focus must be on the net effect of the transfer on the debtor's estate, and the funds available to unsecured creditors; as long as other unsecured creditors are no worse off because the debtor has received an amount reasonably equivalent to what it paid, then no constructive fraudulent transfer has occurred). In contrast, looking to the analysis applicable to the avoidance of a transfer in satisfaction of an equity interest, in the absence of an agreement to the contrary, all equity shares in an enterprise are to be treated equally, such that the value of any particular equity interest depends entirely on the valuation of all similarly situated equity interests, and the assets of an entity may not be distributed to certain equity holders in preference to other similarly situated equity holders in that entity. See, e.g., Crimmins & Peirce Co. v. Kidder Peabody Acceptance Corp., 282 Mass. 367, 185 N.E. 383, 88 A.L.R. 1122 (1933); Alley v. Miramon, 614 F.2d 1372 (5th Cir. 1980). Any transfer of assets to an equity holder in excess of the pro rata value of the equity interest (valued in relation to all similarly situated equity holders) operates as an improper preference of one equity holder over other similarly situated equity holders. Necessarily, any distributions to equity holders of an insolvent entity are manifestly disproportionate because there is no equity
-34-
Case: 10-10683
Page: 54 of 84
value in the insolvent entity, and no equity-based distributions to shareholders can be justified as they are contrary to basic limited liability company and partnership law provisions. See, e.g., O.C.G.A. 14-9-503, 14-9A-46, 14-11-407; DEL. CODE ANN. tit. 6, 17-607, 18-607; Handy, 2000 WL 364199 at pp. 4-5. By these principles, it is clear that the application of the Claim2 reasoning differs materially depending on whether the underlying investments are debt-based or equity-based. The recognition and satisfaction of a debt-based investors latent, unasserted fraud claim as a second antecedent debt claim, through application of the Claim2 reasoning, has no practical impact on the value exchange analysis where the original debt-based investment claim provided an independent basis to satisfy the value exchange analysis in any event. Moreover, in the context of original debt claims, the Claim2 reasoning operates consistently with the general legal premise that debt holders may properly be preferred over other debt holders. By contrast, the recognition and satisfaction of an equity investors latent, unasserted fraud claim, through application of the Claim2 reasoning, as the one and only true antecedent debt claim of that investor for purposes of the value exchange analysis, would completely change the outcome of the value exchange analysis. Save for the transmutation of an equity interest into a fraud based claim, the exchange of the original equity interest would not have been deemed to be for value, given that the investor had affirmatively tendered his essentially worthless
-35-
Case: 10-10683
Page: 55 of 84
equity interest for the transfer. Perhaps the surplusage reasoning in Eby could be ignored where application of the reasoning in no way materially alters the outcome of the value exchange analysis; however, the surplusage reasoning from Eby absolutely cannot be ignored where its application creates a result entirely different from that which would otherwise obtain, shielding avoidance of a transfer that otherwise would be, and should be, avoidable. B. A single court has improperly extended the Claim2 reasoning to the facts at bar, misinterpreting the principles in Eby as actually supporting recharacterization of transfers in respect of equity instruments to be in satisfaction of debt claims, without any meaningful substantive analysis to undergird that conclusion.
From a diligent review, a single court appears to have extended the general rule (that principal distributions from a Ponzi scheme are shielded from avoidance) to factual circumstances very similar to the facts of the instant case, where investors had invested at the outset purely as equity holders in the Ponzi scheme and the trustee was seeking return of transfers in redemption of principal investment amounts.6 The United States Court of Appeals for the Ninth Circuit, in
Two other courts appear to have generally accepted the principle of shielding the avoidance of distributions by a Ponzi scheme to its investors of their principal investment amounts in the specific factual circumstance where the investors invested at the outset purely as equity holders in the Ponzi scheme. One of these cases, Scholes v. Ames, 850 F.Supp. 707 (N.D. Ill 1994), is inapposite because it does not rely on Eby and its progeny to create a debt based on fraud, but rather mistakenly mischaracterizes a limited partnership interest as a contract claim. Id. at 715. The second case, In re Hedged-Investments Associates, Inc., 84
(footnote continued on next page)
-36-
Case: 10-10683
Page: 56 of 84
In re AFI Holding, Inc., 525 F.3d 700 (9th Cir. 2008) examined, albeit in cursory fashion, the issue of whether the same result in the Claim2 context should be applied where investors were equity interest holders, not debt claimants, at the outset, and reached the conclusion that leaving equity investors free from an avoidance claim was the more appropriate result. Id. at 708-09. As such, the AFI court retroactively deemed distributions in respect of equity interests to be in satisfaction of unasserted, unarticulated fraud claims. Id. at 708. In AFI, investors invested as limited partners in an enterprise that operated as a Ponzi scheme. The trustee sought to avoid and recover from at least one equity investor all amounts distributed to him from the scheme, including both principal amounts invested as well as fictitious profits. Id. at 701-02. The AFI court considered the trustees arguments that the court should follow the Ninth Circuits prior reasoning in Hayes v. Palm Seedlings Partners-A (In re Agricultural Research and Tech. Group, Inc.), 916 F.2d 528 (9th Cir. 1990) that distributions to holders of equity interests in respect of their capital contributions are not, ipso facto, for value, but can only be justified where the value of what the investor gave back to the enterprise can be shown to have been reasonably equivalent to the sums the investor recovered. Id.
(footnote continued from previous page)
F.3d 1286 (10th Cir. 1996), merely relied upon the Claim2 principle to support its holding that an original equity transferee cannot shield avoidance of recoveries of fictitious profits received from a Ponzi scheme. Id. at 1289-90. -37www.floridalegalblog.org
Case: 10-10683
Page: 57 of 84
at 705. In Agricultural Research, limited partners had received distributions from a limited partnership in which they had invested, which limited partnership in turn was deemed by the Agricultural Research court to not have acted in good faith in its receipt of distributions from a Ponzi scheme against which the limited partnership held a debt claim. Id. 708-09. Because the limited partners in
Agricultural Research, as equity holders, did not receive the distributions directly from the Ponzi scheme, the AFI court reasoned that the Agricultural Research court did not need to address rescission or restitution rights held by the limited partners in the context of a fraudulent investment scheme. Id. The AFI court concluded that, though it was true that the distributions to the limited partners by the limited partnership in Agricultural Research may not have been for value pursuant to an appropriate value exchange analysis, the reasoning of the Agricultural Research case did not control in the factual circumstances where, as in AFI, equity limited partners received their distributions directly from, and were actually defrauded by, the Ponzi scheme. Id. The AFI court thus rejected the trustees reliance on Agricultural Research, finding what it thought were meaningful distinctions between its case and the facts in Agricultural Research. Id. The AFI court chose instead to adopt the general Eby Claim2 approach espoused in a prior Ninth Circuit case, In re United Energy Corp., 944 F.2d 589
-38-
Case: 10-10683
Page: 58 of 84
(9th Cir. 1991), which had adopted the general principle that distributions to Ponzi scheme victims essentially may be recharacterized as distributions in respect of fraud claims to the extent of the defrauded investors principal contributions to the scheme. Id. at 705-06. As noted above, the United Energy case is simply one in the long line of cases following the Eby Claim2 scenario that are inapposite to the case at bar. United Energy, though it involved a fraudulent investment scheme, no more supported recharacterization of a transfer in respect of an original equity interest into a transfer in respect of a debt claim than did Eby. Specifically, in the United Energy case, investors received distributions in respect of contracts they signed with the fraudulent enterprise. United Energy, 944 F.2d at 590.
Disregarding completely that the United Energy case involved such an underlying debt claim per the investors contractual rights, and without any analysis of that critical fact, the AFI court blithely applied the reasoning of United Energy to AFIs equity transmutation case, essentially in a single sentence: [The limited partner] acquired a restitution claim at the time he bought into [the] Ponzi scheme, just as the investors in United Energy acquired a restitution claim at the time they [invested]. AFI, 525 F.3d at 708. Completely ignoring (or missing) the fact that retroactive recharacterization principles are surplusage for the value analysis in the context of the recognition and satisfaction of two distinct bases of debt claims arising from the same original investment transaction, the AFI court announced
-39-
Case: 10-10683
Page: 59 of 84
that United Energy provides the more complete reasonably equivalent value analysis for an initial transferee. Id. at 706-07. Although United Energy may have indeed provided a more complete fraudulent transfer analysis in the Ponzi scheme context than did Agricultural Research, United Energy certainly did not sufficiently analyze the fundamental legal problems associated with the recharacterization of the character of a distribution in respect of an equity investment into a distribution in respect of a debt claim. The United Energy court did not even face such facts. Accordingly, AFIs total reliance on United Energy is entirely misplaced, and by improperly relying on United Energy without any critical analysis of the fact that United Energy was a Claim2 case, the AFI court wholly failed to conduct any reasoned analysis regarding the fundamental legal problems that should be addressed in connection with any attempt to transmute the character of a distribution in respect of an equity investment into a distribution in respect of a debt claim, a problem in the AFI analysis that the Trustee expressed to the Bankruptcy Court below. Unlike the AFI court, at least the Bankruptcy Court in the case at bar affirmatively recognized that the facts here are distinct from the facts of the historically decided Claim2 cases, evidenced by the Bankruptcy Court stating during oral argument that no court except maybe AFI really addresses the issue in this case. And truth be
-40-
Case: 10-10683
Page: 60 of 84
told, AFI really doesnt address it. It just says, this is the way it is. Doc 37, Pg 114. Despite its recognition that the AFI court did not undertake any sufficiently reasoned analysis of the issues at bar, the Bankruptcy Court undergirded its denial of the Trustees Motion for Partial Summary Judgment essentially by just citing to the decision in AFI. Doc 38, Pgs 12-13. Accordingly, the Trustee respectfully submits that neither the AFI decision, a decision not binding on any court within the Eleventh Circuit or any court outside the Ninth Circuit, nor the Bankruptcy Courts Order below contain sufficient substantive analysis on the issues presented by the instant appeal to warrant deference as a guiding opinion to this Court. Neither the Ninth Circuit in AFI nor the Bankruptcy Court sufficiently analyzed, or even in some instances contemplated at all: (i) the fundamental distinctions that exist between debt and equity, and how application of the Claim2 analysis operates to fundamentally change the nature of the distribution from an equity distribution into a debt distribution; (ii) that the Claim2 analysis operates to fully recognize and satisfy a tort claim that was never even asserted, let alone proven in a court of law, in contravention of all notions of due process; or (iii) that the retroactive recognition and satisfaction of the investors latent tort claims, through a legal fiction, to shield avoidance of the transfers manufactures a result entirely contrary to that which would have occurred had the tort claim in fact been asserted at the
-41-
Case: 10-10683
Page: 61 of 84
time of the redemption, because the mere assertion of the tort claim would have undermined the redeeming investors good faith receipt of the distribution. The Trustee will address these critical failings of analysis in turn. 1. Neither the Ninth Circuit in AFI nor the Bankruptcy Court adequately analyzed the fundamental distinctions between debt and equity.
The Ninth Circuits decision in AFI provides no discussion as to why United Energys and Ebys Claim2 principles can even apply in the context of transfers on account of what were initially pure equity investments. The court entirely fails to address any of the fundamental distinctions between equity and debt set forth herein, or whether the retroactive recharacterization of distributions to equity as distributions to debt might be contrary to operation of state and federal law. By contrast, the United States Bankruptcy Court for the Middle District of Alabama, in In re Terry Mfg. Co., Inc., 2007 WL 274319 (Bankr. M.D. Ala. 2007), recognized that fundamental distinctions exist between the rights of equity and debt holders, and properly refused to follow the Eby line of transmutation reasoning where the transferees from the fraudulent scheme were, from the inception of their investment, equity holders in what was later exposed as a fraudulent enterprise. Id. at *6-7. In Terry, the bankruptcy trustee sought to recover from equity shareholders amounts transferred to them from the fraudulent enterprise prior to the discovery of the fraud and its resultant bankruptcy. The
-42-
Case: 10-10683
Page: 62 of 84
Terry defendants asserted that the principles espoused by in Eby and its progeny insulated them from avoidance of the transfers they received, based on the premise that the transfers to them as defrauded equity holders should be recharacterized as payments in partial satisfaction of their unasserted fraud claims. Id. at *1-3. First, the Terry court recognized that, while Eby and its progeny involved fraudulent investment schemes, those cases did not involve the recharacterization of payments to equity investors as payments of a claim for fraud, stating that the historically decided Claim2 cases involve a Ponzi type fraud scheme, but none of them involve the recharacterization of dividends as the repayment of an indebtedness. Id. at *6. The Terry court then rejected the defendants
vehement arguments premised on Eby and its progeny, stating, Even if the Court assumes that the Defendants were defrauded, the Court is of the view that the restitution defense is invalid as a matter of law; further stating that there is no precedent for the proposition that dividends paid to a stockholder may be recharacterized as payments in some kind of debt. Id. at *7. The Terry court understood and reinforced the irrefutable, fundamental distinctions that exist between debt and equity positions, and appropriately refused to retroactively and automatically recharacterize a distribution affirmatively made in respect of an equity interest to be in satisfaction of some debt-based claim. Unlike the court in Terry, both the AFI court and the Bankruptcy Court wholly discount the form and
-43-
Case: 10-10683
Page: 63 of 84
the substance of the underlying investments; and in the name of equity, retroactively negate the form and substance of the investment that the Investor Defendants purposefully elected to take, and pursuant to which they affirmatively redeemed their investments. The Bankruptcy Court in the instant case did at least engage in some limited examination of the general legal distinctions governing the treatment of equity holders relative to debt holders; however, even the Bankruptcy Court entirely failed to analyze the fundamental legal principles governing the inter se treatment among similarly situated equity holders, and how those principles come to bear on the facts at bar. Recognizing the irrefutable principle that an exchange of a
worthless equity interest is not an exchange for value, the Bankruptcy Court reasoned that such principle operates to recognize[] and enforce[] the priority that claims of creditors for debts have over the equity interests of owners of the enterprise [and] thus effectively redistributes assets from improperly paid holders of equity positions to unpaid creditors. Doc 38, Pg 12. The Bankruptcy Court apparently seeks to constrain the equity versus debt distinctions to the application of the absolute priority rule, a rule that governs the rights of equity holders relative to debt holders and provides that equity holders cannot be paid ahead of legitimate debt holders. In so doing, the Bankruptcy Court entirely misses the separate principle that in the case of equity interests, unlike debt
-44-
Case: 10-10683
Page: 64 of 84
claimants, the law prohibits inequitable distributions among similarly situated inter se equity holders, on the basis that any such distribution in excess of the ratable value of an equity interest operates to the improper preference of one equity holder over another similarly situated equity holder. Following the reasoning of AFI and United Energy, the Bankruptcy Court seeks to avoid this omission of analysis by applying the equitable powers of bankruptcy courts to disregard the form of transactions in favor of their purported substance, reasoning that the substance, not the form of the transaction that created the relationship between the Investor Defendants and the Debtors governs the fraudulent transfer analysis, and that the acquisition and use of funds through a fraudulent scheme is the substance of the transaction in a Ponzi scheme context. Doc 38, Pg 12. The ultimate effect of this reasoning is that the Bankruptcy Court, operating in the name of equity, chose to disregard two fundamental principles of American law (that an exchange of a worthless equity interest is not an exchange for value; and that similarly situated equity holders must be treated ratably) to fashion a result that even the Bankruptcy Court recognizes is not fair. Despite reasoning that the Trustees position arguably represents a more equitable result and should apply in all Ponzi scheme cases, and commending the Trustees attempt to affect equal treatment of all victims of this particular Ponzi scheme, the Bankruptcy Court deferred to the general rule in Ponzi schemes and chose
-45-
Case: 10-10683
Page: 65 of 84
merely to follow the ruling in AFI extending the Claim2 analysis to the facts at bar, reasoning that no sound basis exists for creating a different rule based on the equity nature of the fraudulently induced investments. (emphasis added). The Trustee respectfully disagrees. As set forth herein, numerous legal fundamentals exist that mandate that equity interests be treated fundamentally differently than debt claims; the existence of which certainly provide ample basis to treat original equity investments differently from original debt claims in Ponzi scheme fraudulent transfer cases. The Trustee respectfully requests that this Court give due credence to these legal principles, and recognize that the extension of the Claim2 reasoning to the facts at bar results in impermissible non-ratable treatment among the Debtors similarly situated equity holders. 2. Moreover, neither the Ninth Circuit in AFI nor the Bankruptcy Court adequately analyzed that the Claim2 analysis permits the full recognition and satisfaction of a tort claim that was never even asserted, let alone proven in a court of law, in contravention of all notions of due process and requirement of articulation of claims. Doc 38, Pgs 12-13
In the name of equity, AFI, each of the courts in the Eby line, as well as the Bankruptcy Court here fully recognize and satisfy the unasserted, unarticulated tort claims of defrauded redeeming investors, despite the fact that no such claims were ever asserted, let alone proven in any court of law, at the time of the subject transfers. Both the AFI court and the Bankruptcy Court extend the logic from the -46www.floridalegalblog.org
Case: 10-10683
Page: 66 of 84
historically decided debt-based investment cases, and transmute the character of the equity distributions into distributions in satisfaction of fraud claims, without any such fraud claims having ever been articulated. At no point in AFI or in the Bankruptcy Courts Order is any consideration given whatsoever to the fact that this transmutation without articulation reasoning allows for the automatic, retroactive conversion of a distribution in respect of equity to be a distribution in respect of debt, or how such automatic transmutation contravenes principles of notice, fairness and due process that mandate that a claim must first be articulated in order to be affirmatively satisfied, particularly where the silent satisfaction of such claim eviscerates fundamental and long safeguarded distinctions between debt and equity. It is a fundamental tenet of law that a claimant must articulate the basis for a claim and provide some form of public notice that a claim has been asserted. See Grymes v. Sanders, 93 U.S. 55, 62, 23 L.Ed. 798 (1876) (Where a party desires to rescind upon the ground of mistake or fraud, he must, upon the discovery of the facts, at once announce his purpose, and adhere to it.); Cordes & Co. Financial Services, Inc. v. A.G. Edwards & Sons, Inc., 502 F.3d 91 (2d Cir. 2007) (recognizing the broad principle that plaintiffs generally must assert their legal rights and interests). Consistent with this reasoning, claimants cannot obtain relief not sought. In re Bayou Group, LLC, 362 B.R. 624, 635 (Bankr. S.D.N.Y. 2007)
-47-
Case: 10-10683
Page: 67 of 84
(reasoning that the failure to assert a claim for prejudgment interest precludes later consideration of such claim); HBE Leasing Corp. v. Frank, 61 F.3d 1054, 1058-59 (2d Cir. 1995) (transfer for unasserted inchoate interests is not fair consideration). Moreover, Rules 7001(2), (8) of the Federal Rules of Bankruptcy Procedure require an adversary proceeding, with open and notorious consideration of the relief sought, to determine the priority of an interest in property or to subordinate any allowed claim or interest. The United States Bankruptcy Court for the Northern District of Illinois, in In re Lake States Commodities, Inc., 253 B.R. 866 (Bankr. N.D. Ill. 2000), recognized this principle, and, in the Ponzi scheme context, required purportedly defrauded investor victims to articulate their fraud claims in the context of asserting defenses to fraudulent transfer claims. Id. at 880. In Lake States, while the court reasoned that, under state law, a party who has been fraudulently induced to enter a contract may sue to have the contract rescinded, with restitution ordered, in order for defrauded investors to assert restitution claims as part of a value exchange argument, they must at least first make a prima facie showing of a fraud claim. Id. (noting that to make a state law fraud claim requires proof that a defendant: (1) made a false statement of material fact, (2) knowing that the statement was false, (3) intending that the plaintiff rely on the statement, (4) that the plaintiff did rely on the statement, (5) that reliance was justified, and (6) that
-48-
Case: 10-10683
Page: 68 of 84
the plaintiff suffered damage as a result.). Accordingly, the court in Lake States appropriately refused, as this Court should, to accept the principles of retroactive recharacterization of the nature of transfers without at least an adequate articulation and assertion of the underlying claim. The Investor Defendants have cited to In re M & L Business Machine Co., a case from Ebys line, for the general proposition that defrauded investors have rescission and restitution claims that arose at the time they invested, comparing those claims to rights defrauded parties have under Georgia law. 84 F.3d at 1332. However, the Georgia authority cited stands for the proposition that a fraudulently induced party seeking redress has the right to take affirmative action to remedy his injury by either affirming or rescinding the contract and suing for damages. Ainsworth v. Perreault, 254 Ga. App. 470, 471 (2002). The defrauded Investor Defendants herein never took any such affirmative action to assert or articulate any fraud claims prior to the filing of the Debtors bankruptcy cases. Now that the bankruptcy cases have been filed, however, every defrauded investor has been afforded the opportunity to assert their fraud claims against the Debtors, in an open forum with proper notice to all parties in interest, consistent with all notions of due process. The articulation, assertion and judicial approval of all of the investors fraud claims may now be formally adjudicated through the claims allowance process in the Debtors bankruptcies, such that the investors fraud claims may be
-49-
Case: 10-10683
Page: 69 of 84
administered and satisfied fairly and equally in a manner consistent with, and not in contravention of, the principles of Section 510(b), 1123(a)(4) and 1129(b), as set forth below. (i) Transmutation without articulation contravenes Section 510(b) of the Bankruptcy Code, which reflects Congressional intent regarding recharacterization of claims.
The silent recharacterization of equity distributions into debt distributions is inconsistent with the operation of Section 510(b) of the Bankruptcy Code, through which Congress created a specific distribution scheme through Section 510(b) to address the recharacterization of equity positions as fraud claims. Section 510(b) provides: For the purpose of distribution under this title, a claim arising from rescission of a purchase or sale of a security of the debtor or of an affiliate of the debtor, for damages arising from the purchase or sale of such a security, or for reimbursement or contribution allowed under section 502 on account of such a claim, shall be subordinated to all claims or interests that are senior to or equal the claim or interest represented by such security, except that if such security is common stock, such claim has the same priority as common stock. (emphasis added) Mandatory subordination under Section 510(b) represents Congressional judgment that claims by equity holders arising from their purchase of stock must be subordinated to the claims of conventional creditors, the purpose of which is to recognize that the nature of claims of equity interest holders is different from those of creditors, and to protect creditors from equity holders' trying to dilute the claim -50www.floridalegalblog.org
Case: 10-10683
Page: 70 of 84
pool by claiming creditor status. In re USA Commercial Mortgage Co., 377 B.R. 608 (BAP 9th Cir. 2007); Jezarian v. Raichle (In re Stirling Homex Corp.), 579 F.2d 206 (2d Cir. 1978). The United States Court of Appeals for the Second Circuit, in Stirling Homex, analyzed the issue of whether defrauded equity holders should be treated on par with general unsecured creditors, and reasoned that claims of defrauded equity holders should be subordinated to claims of conventional creditors. 579 F.2d at 210. Moreover, the Second Circuit noted that the
Legislative history for the Bankruptcy Reform Act of 1978 explains that [i]f the security is an equity security, the damages or rescission claim is subordinated to all creditors and treated the same as the equity security itself. Id. at 214 (emphasis added) (citing H.R.Rep.No.95-595, 95th Cong., 1st Sess. (1977)). Transmutation without articulation principles, which permit full satisfaction of equity interests as though they were fraud claims, are wholly inconsistent with the operation of Section 510(b) because, even if Investor Defendants are deemed to have been fraud claimants at the time of the distribution, such characterization does not permit them to receive distributions ahead of either existing general unsecured creditors or, importantly, other similarly defrauded investors. To the extent that the legal fictions supporting transmutation without articulation principles arose prior to the Stirling Homex decision and the Bankruptcy Reform Act of 1978, they are wholly inconsistent with Section 510(b)
-51-
Case: 10-10683
Page: 71 of 84
of the Bankruptcy Code and those cases that have followed its enactment. It is entirely at odds with present-day bankruptcy law, and would undermine the vitality of Section 510(b), to fundamentally alter this distribution scheme by allowing the character of the equity redemption transfers to be silently and automatically transmuted into satisfaction of debt claims, and to thereby permit certain equity investors, through a transmuted claim, to take ahead of other equally defrauded investors. If, under Section 510(b), an equity holder who actually successfully sues with notice and the safeguards of due process to have his equity investment treated as a claim rather than as equity can nonetheless have no greater entitlement to recover his investment than any other investor who made a similar investment, a fortiori, an Investor Defendant can certainly not have a better legal entitlement to justify his retention of his repaid investment where that retention is premised on a fraud claim that was never even asserted, let alone adjudicated in his favor before payment was made. Thus, this Court should refuse to retroactively bless a result based on a legal fiction that would allow payment to one defrauded equity holder but not to others similarly defrauded, where that result could not have been legally justified even had a suit to convert an equity interest into a debt claim been successfully brought in a bankruptcy court.
-52-
Case: 10-10683
Page: 72 of 84
(ii)
Transmutation without Articulation contravenes Sections 1123 and 1129 of the Bankruptcy Code, which reflect Congressional intent to assure the ratable treatment of articulated claims of similarly situated parties.
The Bankruptcy Code requires that a bankruptcy plan cannot discriminate unfairly, and must be fair and equitable, with respect to each class of claims or interests that is impaired under, and has not accepted, the plan. 11 U.S.C. 1129(b)(1). The Bankruptcy Code requires equality of treatment among holders of claims or interests of equal rank, such that similarly situated holders are entitled to equal distribution. See, e.g., In re Sentry Operating Co. of Texas, Inc., 264 B.R. 850 (Bankr. S.D. Tex. 2001); Begier v. IRS, 496 U.S. 53, 58, 110 S.Ct. 2258, 110 L.Ed.2d 46 (1990). Whereas fair and equitable principles regulate priority
among classes of creditors having higher and lower priorities, the principle that the plan not discriminate unfairly prohibits inequitable treatment among parties of the same relative priority. See Bruce A. Markell, A New Perspective on Unfair Discrimination in Chapter 11, 72 Am. Bankr. L.J. 227 (1998). Consistent with such principles, Section 1123(a)(4) of the Bankruptcy Code requires that a bankruptcy plan provide the same treatment for each claim or interest of a particular class, unless the holder of a particular claim or interest agrees to a less favorable treatment of such particular claim or interest. 11 U.S.C. 1123(a)(4). Because articulation and recognition of all of the IMA investors fraud claims may now occur formally through the Debtors bankruptcies, the Bankruptcy -53www.floridalegalblog.org
Case: 10-10683
Page: 73 of 84
Court is provided with the opportunity to presently establish and recognize that each and every equity investor in one or more of the Debtors possessed tort claims that arose at the time each investor invested in the Debtors.7 On notice to all interested parties, previously unarticulated fraudulent inducement claims are now articulated in an open manner, consistent with the requirements of due process. With all IMA investors recognized as similarly situated fraud claimants rather than as equity holders, they are subject to the operation of Section 510(b) and to the general requirements of both Sections 1129(b) and 1123(a)(4) of the Bankruptcy Code; hence, all investors can appropriately be treated ratably with those certain fortunate Investor Defendants who received distributions from the Debtors prior to discovery of the fraudulent scheme. By contrast, tolerating the recharacterization of equity interests into debt claims pursuant to the transmutation without articulation approach results in unequal treatment among similarly situated IMA equity holders who properly belong in the same investor class. In the absence of investors articulating, and a
7
If such investor tort claims are established in the Debtors bankruptcy cases, there will then exist a body of creditors at the time of each distribution to an Investor Defendant, and there will exist a body of creditors now for whose benefit these actions are brought, though all such fraud creditors are properly subordinated to holders of general unsecured and priority claims. See Scholes v. Lehmann, 56 F.3d 750 (7th Cir 1995) (recognizing that unknowingly defrauded limited-partner investors were potential tort creditors, and that their claims made the enterprise insolvent for all times relevant to transfers).
-54-
Case: 10-10683
Page: 74 of 84
court judicially allowing, a transmutation of an equity interest into a fraud claim, deeming the prior payments to the investors to have been in retroactive satisfaction of fraud claims would be tantamount to permitting an unfair and discriminatory distribution among similarly situated defrauded claim holders. Allowing transfers to certain defrauded investors in respect of their transmuted fraud claims would be grossly discriminatory to investors who were not fortunate to have received transfers from IMA on account of their equity investments, but have equally premised and unasserted tort claims as well, thereby creating the very discriminatory treatment that the Bankruptcy Code was designed to proscribe. 3. Finally, neither the Ninth Circuit in AFI nor the Bankruptcy Court analyzed that the retroactive recognition and satisfaction of a tort claim contravenes the operation of Section 548(c) of the Bankruptcy Code.
Finally, this Court should disregard the reasoning in AFI that supports the recognition and satisfaction of unasserted, unarticulated tort claims of defrauded redeeming investors, because such reasoning fails to consider how the operation of the Claim2 reasoning contravenes the principles of Bankruptcy Code Section 548(c) and correlative state law provisions. As a matter of statute, and as noted earlier, both under Bankruptcy Code Section 548(c) and correlative state fraudulent conveyance laws, a recovering investor may retain payments received from a fraudulent transferor only if he can establish that he received the transfers both in good faith and for value. Had any Investor Defendant actually asserted a -55www.floridalegalblog.org
Case: 10-10683
Page: 75 of 84
fraud claim at a time before repayment of his investment, premised on having been fraudulently induced to invest in what later was revealed to have been a Ponzi scheme, that investor would have been precluded from asserting an affirmative defense to avoidance because he could not show receipt of such distribution in good faith due to his knowledge of the fraud. See, e.g., In re Independent Clearing House, 77 B.R. at 862. Therefore, the transmutation without
articulation concept that allows for the conversion of the payment in respect of an equity interest into a payment on a debt claim permits a recovery to the investor, when, had the investor actually asserted a fraud claim, that mere assertion, ipso facto, would have eviscerated the investors receipt of the transfer in good faith. To erect a legal fiction that treats repayments of equity from a Ponzi scheme to instead be in satisfaction of an investors fraud claim, in a setting where such fraud was not even known, let alone articulated or asserted by the investor in a legal proceeding, flies in the face of the statutory principles adopted under both the Bankruptcy Code and corresponding fraudulent conveyance state law that, for a century or more, has disallowed any transfer to an investor where that investor is aware of the transferor enterprises fraudulent actions or nature. Whereas it may be appropriate for a court to craft a legal fiction to reach a result that is entirely congruent with what the outcome should be, it should never be appropriate for a court to craft a legal fiction wherein doing so the legislative intent of a statute,
-56-
Case: 10-10683
Page: 76 of 84
federal or state, would be emasculated and undermined.
Thus, because any
investor who knew of IMAs fraud could not insulate from avoidance his receipt of payments from IMA for the principal amount he invested, it is entirely inappropriate to allow an unarticulated and unknown fraud claim to be used as a shield to avoidance of an investors recovery from the scheme. To do otherwise allows a judicial contrivance -- an unarticulated claim for fraud -- to be the predicate for allowing the unequal protection of similarly innocent investors, where guarding against such inequality was the very purpose why the good faith defense was adopted in the first place. CONCLUSION For the reasons set forth herein, this Court should reject the extension of the Claim2 analysis to the instant case to retroactively transmute distributions affirmatively made in respect of equity interests to be deemed to have been in satisfaction of latent, unasserted fraud claims of the redeeming Investor Defendants. Rather, this Court should recognize that the Investor Defendants tendered nearly worthless equity interests in exchange for the transfers from the Debtors; accordingly, the Investor Defendants cannot establish that they provided value in exchange for such transfers, and cannot establish an affirmative defense under Section 548(c) of the Bankruptcy Code or state law equivalents. As such, assuming establishment of the Trustees prima facie avoidance case against each
-57-
Case: 10-10683
Page: 77 of 84
Investor Defendant, all transfers to the Investor Defendants, including principal and profit, should be avoidable and recoverable by the Trustee, enabling the Trustee to effect an equitable distribution of the Debtors limited assets to all the defrauded investors herein. [SIGNATURES FOLLOW]
-58-
Case: 10-10683
Page: 78 of 84
Case: 10-10683
Page: 79 of 84
Case: 10-10683
Page: 80 of 84
CERTIFICATE OF SERVICE I hereby certify that on the 23rd day of April, 2010, I caused to be served a true and correct copy of the foregoing BRIEF OF APPELLANT WILLIAM F. PERKINS, PLAN TRUSTEE FOR INTERNATIONAL MANAGEMENT ASSOCIATES, LLC and accompanying appendix via First Class US mail postage prepaid to the parties listed below.
Aena Y. Haines c/o Jeffrey Lee Costell, Esq. Costell and Cornelius 1299 Ocean Avenue, Suite 400 Santa Monica, CA 90401 Paul M Spizzirri, Esq. Bernadine H Layne, Esq. Counsel for Clays Spizzirri & Associates LLC 1401 Peachtree St., M-100 Atlanta, GA 30309
Aena Y. Haines 3127 East Windmere Drive Phoenix, AZ 85048
Akil Kenneth Secret, Esq. Counsel for Joyce Wright Suite 204 4153-B Flat Shoals Parkway Decatur, GA 30034
James E. Dearing, Jr. PC Counsel for Alyce and Janis Ware Suite 560 730 Peachtree St. NE Atlanta, GA 30308
Clarence & Valerie July 631 Belle Grove Drive Jonesboro, GA 30238
Michael F. Holbein, Esq. Counsel for Manuel F. Mair Arnall Golden Gregory LLP Suite 2100 171 17th Street, NW Atlanta, GA 30363
David W. Cranshaw, Esq. Counsel for Joseph P. Thornton Morris, Manning & Martin, L.L.P. 1600 Atlanta Financial Center 3343 Peachtree Road, N.E. Atlanta, GA 30326 Marco D. Coleman c/o Michael V. Coleman, Esq. Sharon M. Lewonski, Esq. Epstein, Becker & Green, P.C. 945 East Paces Ferry Road, Suite 2700 Atlanta, Georgia 30326
Charles H. Louis 1308 East Gloria Switch Lafayette, LA 70507
Rodney Williams-Cochrane 199 Buffalo Avenue Apt. # 3 Brooklyn, NY 11213-3206
Jonathan H Fain, Esq. Counsel for X-Spurts Investment et al., David Laird, et al.; George Curtis, et al. Jonathan H. Fain and Assoc., PC 3555 Eaglerock Drive Atlanta, GA 30340
Ibrahim Abdur-Rabbani 567 West End Place Atlanta, GA 30310
Ivy Anderson 147-14 229th Street Springfield, NY 11413
Erroll J. Bailey 6 Wieuca Trace Atlanta, GA 30342
Case: 10-10683
Page: 81 of 84
Central Georgia Anesthesia Services, PC Dr. Sanjiwan Tarabadkar 840 Pine Street, Suite 770 Macon, GA 31201 David & Deborah H. Laird George Russell Curtis, et al. c/o Timothy W. Mungovan, Esq. Nixon Peabody LLP 100 Summer Street Boston, MA 02110
James Braxton Jo Ann Braxton Davis Craig Davis c/o Jerry A. Daniels, LLC 33 South Clayton Street, Suite 301 Lawrenceville, GA 30045 Nathaniel, Simone & James Bronner c/o Robert J. Mottern Investment Law Group of Gillett, Mottern 1230 Peachtree Street NE, Ste. 2445 Atlanta, GA 30346 TBC Capital, Inc., J. Shelton, J. Shelton, III, K. Burks & Cornell Shelton c/o Thomas M. Byrne, Esq. Sutherland Asbill & Brennan LLP 999 Peachtree St, NE Atlanta, Georgia 30309-3996
Joan Edwards 4720 LaBranch Houston, TX, 77004
Cheryl Edwards 29 Avenida Fiori St. Henderson, NV 89011
Delmena Bryan 183-26 Arcade Avenue St. Albans, NY 11412
Theodore Burnett Suite 918 8540 South Sepulceda Boulevard Los Angeles, CA 90045
Theodore Paris 220 Northwest 12th Street Delray Beach, FL 33444
Elayne R. Rossi Revocable Trust c/o , Elayne R. Rossi, Trustee 700 South Ute Avenue Aspen, CO 81611
Eric Curtright c/o Lee A. Frison, Jr. Promenade II, Suite 1900 1230 Peachtree Street Atlanta GA, 30309 Terrence J. Edwards 285 Centennial Park Drive No. 1006 Atlanta, GA 30313
Booker T. Seymour 4260 Wieuca Overlook Atlanta, GA 30342
Laura Pinkney 3996 Degan Blvd. Los Angeles, CA 90008
Cara Flint 1870 Crestridge Place Atlanta, GA 30345
Blaine E. Bishop 3117 West Addison Drive Alpharetta, GA 30022
William J. Gallassero 1222 Anse Broussard Highway Breaux Bridge, LA 70517
Keenan P. Gist c/o Edward F. Danowitz, Esq. Danowitz & Associates, P.C. 300 Galleria Parkway, Suite 960 Atlanta, GA 30339 Joseph and Lydia Gardner 9783 Midship Way Building 202 # 202 West Palm Beach, FL 33411
Paul DeRobbio 1019 Delaware Street Huntington Beach, CA 92648
Duvall & Claude Hall 400 Diplomate Parkway, Apt. 611 Hallandale, FL 99009
Erinn F. Harley-Lewis 520 West 43rd Street New York, NY 10036
Karen Thompkins 550 Peachtree Sreet Suite 1275 Atlanta, GA 30308
Case: 10-10683
Page: 82 of 84
Glenn M. Herbert Vocational Rehabilitation Services of Lafayette 222-B Rue DeJean Lafayette, LA 70508 Gregory and Lawrence Hooper c/o Sblend A. Sblendorio, Esq. Hoge Fenton Jones & Appel, Inc. 6155 Stoneridge Drive, Ste. 200 Pleasanton, CA 94588
William J. Gallassero PO Box 1443 Breaux Bridge, LA 70517
Bruce A. and Cynthia Hines 5970 Riverwood Drive NW Atlanta, GA 30328
Melvin Bishop 313 West Smithfield Drive Dolomite, AL 35061
Thomas Barrett Registered Agent for International Medical Systems, LLC 7889 Ancon Drive Fayetville, NC 28304
Linda C. Jackson 300 Commons Gate Court Roswell, GA 30075
Mt. Nebo Baptist Life Center, Inc. c/o Gregory T. Bailey, Esq. 571 Culberson Street Atlanta, GA 30310
George L. Jeter 1704 Lake Cove Way Atlanta, GA 30331
Suzanne Mair 6466 West Sample Road Coral Springs, FL 33065
John & Roxanne Maughan c/o Robert H. McDonnell, Esq. 260 Peachtree Street Suite 2200 Atlanta, GA 30303
William McDade c/o Mark G. Trigg, Esq. Greenberg Traurig LLP Suite 400 The Forum 3290 Northside Parkway Atlanta, GA 30327 Joseph Moore c/o Kevin M. Farmer, Esq. Farmer, Hiers, Bushnell & Drye LLC 990 Hammond Drive, Suite 200B Atlanta, GA 30338
Thomas P. McManners 805 Clemont Drive, NE Atlanta, GA 30306
Hyacinth Miller 54 Randolph Place South Orange, NJ 07079
Michelle Peoples-Wisneski David Wisneski c/o Christopher D. Phillips Lamberth Cifelli Stokes Ellis & Nason, PA 3342 Peachtree Road, NE Ste. 550 Atlanta, GA 30326
Valerie Peoples 3320 Hagger Way East Point, GA 30344
Paul DeRobbio 1161 Montana Avenue Apt. 103 Los Angeles, CA 90049
Roland Pinkney 370 Prestmoor Place Atlanta, GA 30331
Mustafa Qudsi 135 Caillouet Place Lafayette, LA 70501-7807
Fred C. & Sherri D. Redfern 600 Whitney Ranch Drive Henderson, NV 89014
James Eric Reese 6542 Shenandoah Avenue Los Angeles, CA 90056
Stephen Regan, Sr. 1061 Weeping Willow Drive Breaux Bridge, LA 70517
Anthony Ricciardi 901 Donelle Ave Las Vegas, NV, 89123
Case: 10-10683
Page: 83 of 84
Star 6 Investments, Ltd. c/o Ben Chang Wang, Registered Agent 3331 Colbert Avenue Los Angeles, CA 90066
Algernon O. Steele Marcia G. Riley 320 West Berwicke Common Atlanta, GA 30342
Ernest Whonder 4 Cypress Lane Cortland, NY 10567
Takeo Spikes 5005 Heatherwood Court Roswell, GA 30075
Kheisha Friday 6031 Hitt Lake Court Stone Mountain, GA 30087
Bruce & Renee Withers 18700 Kuhlman Road Bend, OR 97701
Cheryl Worthy-Pickett 2129 Briarlake Drive Atlanta, GA 30345
William T. Perkins c/o Rodney L. Eason, Esq. The Eason Law Firm 6150 Old National Highway, Suite 200 College Park, GA 30349-4367
Charles I. Pollack & William R. Lester, Esqs. Counsel for Atlanta Perinatal, Page, Bootstaylor, Grone, Dorsey, Andrews, Page Segal, Fryer, Shuster & Lester, P.C. 1050 Crown Pointe Parkway, Suite 410 Atlanta, GA 30338
Erich G. Randolph & DeCarlo, Amanda Eskridge & Laverne Jones c/o Kevin A. Stine, Esq. Baker Donelson Monarch Plaza, Suite 1600 3414 Peachtree Road, N.E. Atlanta, GA 30326 Frederick T. Work One Baltimore Place Suite 400 Atlanta, GA 30308
Edwana Adams 2607 Willow Grove Road, NW Acworth, GA 30101
Mario & Charisse Brossard 7714 13th St. NW Washington, DC 20012
Carol Pinkney 13521 Brandy Oaks Drive Chesterfield, VA 23832
Roger O'Neal Family Trust Roger O'Neal, Trustee c/o GTO Development, LLC 2301 Rosecrans Avenue El Segundo, CA 90245 Aena Y. Haines 163 North Arnaz Drive Unit 1 Beverly Hills, CA 90211 Jessie & Joyce Champagne c/o Thomas D. Brumbaugh, Esq. Champagne & Brumbaugh P.O. Box 3764 Lafayette, LA 70502 John & Roxanne Maughan c/o Robert H. McDonnell, Esq. 260 Peachtree Street, Suite 2200 Atlanta, GA 30303
Stephen Atwater 2510 Sugarloaf Club Drive Duluth, GA 30097
Marcus Bishop c/o Max C. Pope, Jr. Esq. 1929 Third Avenue North, Suite 700 Birmingham, AL 35203
Annette K. Bond c/o James K. Knight, Jr. 401 Atlanta Street Marietta, GA 30060
Jenny Lynn Perman 4565 Fitzpatrick Way Norcross, GA 30092-1002
David and Joni Robison 9100 Eagle Hills Drive Las Vegas, NV 89134
Robert L. Edwards, III 1350 Audubon Estates SW Atlanta, GA 30311
Case: 10-10683
Page: 84 of 84

Perkins v. Haines - Initial Brief

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Perkins v. Haines - Initial Brief

Uploaded by

Copyright:

Available Formats

Case: 10-10683

Date Filed: 04/23/2010

Date Filed: 04/23/2010

Date Filed: 04/23/2010

Date Filed: 04/23/2010

Date Filed: 04/23/2010

Date Filed: 04/23/2010

Date Filed: 04/23/2010

Date Filed: 04/23/2010

Date Filed: 04/23/2010

Date Filed: 04/23/2010

Date Filed: 04/23/2010

Date Filed: 04/23/2010

Date Filed: 04/23/2010

Date Filed: 04/23/2010

Date Filed: 04/23/2010

Date Filed: 04/23/2010

Date Filed: 04/23/2010

Date Filed: 04/23/2010

Date Filed: 04/23/2010

Date Filed: 04/23/2010

Date Filed: 04/23/2010

STATEMENT OF THE CASE A. Preliminary Statement

Date Filed: 04/23/2010

Date Filed: 04/23/2010

Date Filed: 04/23/2010

Date Filed: 04/23/2010

Date Filed: 04/23/2010

Date Filed: 04/23/2010

Date Filed: 04/23/2010

Date Filed: 04/23/2010

Date Filed: 04/23/2010

Date Filed: 04/23/2010

Date Filed: 04/23/2010

Date Filed: 04/23/2010

Date Filed: 04/23/2010

Date Filed: 04/23/2010

Date Filed: 04/23/2010

Date Filed: 04/23/2010

Date Filed: 04/23/2010

Date Filed: 04/23/2010

Date Filed: 04/23/2010

Date Filed: 04/23/2010

Date Filed: 04/23/2010

Date Filed: 04/23/2010

Date Filed: 04/23/2010

Date Filed: 04/23/2010

Date Filed: 04/23/2010

Date Filed: 04/23/2010

Date Filed: 04/23/2010

Date Filed: 04/23/2010

Date Filed: 04/23/2010

(footnote continued from previous page)

Date Filed: 04/23/2010

Earnings Before Interest Depreciation Taxes & Amortization.

Date Filed: 04/23/2010

Date Filed: 04/23/2010

Date Filed: 04/23/2010

Date Filed: 04/23/2010

Date Filed: 04/23/2010

(footnote continued from previous page)

Date Filed: 04/23/2010

Date Filed: 04/23/2010

Date Filed: 04/23/2010