[PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT
________________________
FILED
No. 10-10683 U.S. COURT OF APPEALS
________________________ ELEVENTH CIRCUIT
OCTOBER 27, 2011
JOHN LEY
Bkcy. No. 09-00601-PWB
CLERK
WILLIAM F. PERKINS,
Plaintiff-Appellant,
versus
AENA Y. HAINES,
JAMES BRONNER,
SIMONE BRONNER,
NATHANIEL BRONNER,
GEORGE RUSSELL CURTIS, SR.,
et al.,
Defendants-Appellees.
________________________
Appeal from the United States Bankruptcy Court
for the Northern District of Georia
_________________________
(October 27, 2011)
Before EDMONDSON and MARTIN, Circuit Judges, and HODGES,* District
Judge.
*Honorable Wm. Terrell Hodges, U. S. District Judge for the Middle District of Florida,
sitting by designation
HODGES, District Judge.
International Management Associates, LLC, and several related entities (the
“Debtors”) were operated as the instruments of a Ponzi scheme.1 A receiver
ultimately filed voluntary petitions in the bankruptcy court seeking relief for each
of the Debtors under Chapter 11 of the Bankruptcy Code. A consolidated plan of
liquidation was approved and William F. Perkins was appointed as Plan Trustee.
The Trustee then instituted a number of adversary proceedings in the bankruptcy
court seeking to avoid and to recover distributions that had been made to the
investors in the Debtors. The Trustee claimed that transfers to the investors prior
to the collapse of the Ponzi scheme were “fraudulent transfers” under 11 U.S.C. §
548(a)(1)(A) and applicable state law. The investors asserted an affirmative
defense under 11 U.S.C. § 548(c), claiming that the transfers were “for value.”
The Trustee moved for partial summary judgment. The bankruptcy court denied
the motion, effectively upholding the availability of the investors’ affirmative
defense.
1
The essence of a Ponzi scheme is to use newly invested money to pay off old investors
and convince them that they are earning profits rather than losing their shirts. United States v.
Orton, 73 F.3d 331, 332, n. 2 (11th Cir. 1996) (internal quotations omitted).
2
The Trustee filed this appeal.2 It presents an issue of first impression in this
Circuit. We affirm.
I.
Kirk Wright formed the Debtors purportedly to manage and operate them as
hedge funds, each of which was structured either as a limited liability company or
a limited partnership. In reality, Wright used the Debtors to operate a fraudulent
Ponzi scheme whereby capital contributions made to the Debtors by later equity
investors were used to repay earlier investors more than their investments were
actually worth, as well as fictitious profits.3 This was done to perpetuate the
illusion that the Debtors had positive investment gains, to keep existing investors
2
For interlocutory orders, the court of appeals has appellate jurisdiction in a bankruptcy
case when the bankruptcy court (or the district court on review) certifies that: (1) an order entered
in the case involves a question of law as to which there is no controlling decision of the court of
appeals for the circuit or of the Supreme Court, or if it involves a matter of public importance;
(2) the order involves a question of law that requires resolution of conflicting decisions; or (3) an
immediate appeal from the order may materially advance the progress of the case or proceeding.
See 28 U.S.C. § 158(d)(2)(A); In re Barrett, 543 F.3d 1239, 1241 (11th Cir. 2008). The
bankruptcy court certified that (1) and (3) are present and we accepted the appeal.
We will review the Bankruptcy Court’s conclusions of law de novo. Barrett, 543 F.3d at
1241; Green Tree Acceptance, Inc. v. Calvert (In re Calvert), 907 F.2d 1069, 1071 (11th Cir.
1990). See also Gray v. Manklow (In re Optical Techs., Inc.), 246 F.3d 1332, 1334 (11th Cir.
2001) (“an appellate court reviews a bankruptcy court’s grant of summary judgment de novo”).
3
The bankruptcy court, as urged by the parties, assumed these facts for purposes of
deciding the Trustee’s motion for partial summary judgment. The court expressly noted that it
was not determining any other issues, claims, or defenses. The parties agree that these facts can
be assumed for this appeal as well. This Court’s acceptance of that assumption should not be
interpreted as a ruling on any factual or legal matter other than the “for value” issue of law: the
sole issue argued and before us.
3
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 each investor defendant held an equity interest in one or more of the Debtors,
denominated as a membership unit or limited partnership interest. At some point
during the operation of the Ponzi scheme, each investor defendant received one or
more transfers of property from one or more of the Debtors, representing returns of
principal and/or purported profits on their equity investments.
II.
With respect to Ponzi schemes, transfers made in furtherance of the scheme
are presumed to have been made with the intent to defraud for purposes of
recovering the payments under §§ 548(a) and 544(b). See In re AFI Holding, Inc.,
525 F.3d 700, 704 (9th Cir. 2008); Conroy v. Shott, 363 F.2d 90, 92 (6th Cir.
1966). See also Cuthill v. Greenmark (In re World Vision Entertainment, Inc.),
275 B.R. 641, 656 (Bankr. M.D. Fla. 2002). For purposes of this appeal, as in the
bankruptcy court, it is presumed that all of the Debtors’ transfers to the investor
defendants qualify as fraudulent transfers under § 548(a)(1)(A) and applicable
state law.
4
However, § 548(c) provides a transferee with an affirmative defense where
the transferee acts in good faith and “[gives] value to the debtor in exchange for
such transfer . . . .” The term “value” is defined to include “satisfaction or
securing of a present or antecedent debt of the debtor.” 11 U.S.C. § 548(d)(2)(A).
Although antecedent debt is not defined, the term “debt” is stated to include
“liability on a claim,” 11 U.S.C. § 101(12), and “claim” is broadly defined as the
“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.” 11 U.S.C. § 101(5).4
In the case of Ponzi schemes, the general rule is that a defrauded investor
gives “value” to the Debtor in exchange for a return of the principal amount of the
investment, but not as to any payments in excess of principal. See e.g., Donnell v.
Kowell, 533 F.3d 762, 770 (9th Cir. 2008); Scholes v. Lehmann, 56 F.3d 750,
757-58 (7th Cir. 1995). Courts have recognized that defrauded investors have a
claim for fraud against the debtor arising as of the time of the initial investment.
Jobin v. McKay (In re M & L Business Mach. Co., Inc.), 84 F.3d 1330, 1340-42
(8th Cir. 1996); Wyle v. Rider (In re United Energy Corp.), 944 F.2d 589, 596 (9th
Cir. 1991). Thus, any transfer up to the amount of the principal investment
4
The Parties agree that the state law definition of “claim” and “debt” tracks the definitions
set forth in 11 U.S.C. § 101.
5
satisfies the investors’ fraud claim (an antecedent debt) and is made for “value” in
the form of the investor’s surrender of his or her tort claim. Such payments are not
subject to recovery by the debtor’s trustee. Donnell v. Kowell, 533 F.3d 762, 772
(9th Cir. 2008); In re M & L Business Mach. Co., 84 F.3d at 1342; In re United
Energy, 944 F.2d at 596, Eby v. Ashley, 1 F.2d 971 (4th Cir. 1924). Any transfers
over and above the amount of the principal – i.e., for fictitious profits – are not
made for “value” because they exceed the scope of the investors’ fraud claim and
may be subject to recovery by a plan trustee. Sender v. Buchanan (In re Hedged-
Investments, Assoc., Inc.), 84 F.3d 1286, 1290 (10th Cir. 1996); In re United
Energy, 944 F.2d at 595, n. 6.
With the exception of AFI Holding, all of the decisions previously cited
address circumstances in which the defrauded investors held claims against the
instrument of the fraudulent scheme either in tort law or through some sort of
contractual arrangement. They do not explicitly reach the present case in which
the investors held an equity interest in the insolvent debtors. For that reason, the
Trustee urges the court to reject AFI Holding, and argues that the general rule
should not apply in this case. His theory is that the payments to the investors
operated to redeem their equity interests and were not made in satisfaction of a
debt.
6
The Trustee hangs his hat on a line of cases holding that transfers to redeem
an equity investment in an insolvent entity (initially made free of fraud) cannot
constitute a transfer “for value.” See e.g., Consove v. Cohen (In re Roco Corp.),
701 F.2d 978, 982 (1st Cir. 1983); Schafer v. Hammond, 456 F.2d 15, 17-18 (10th
Cir. 1972); Lytle v. Andrews, 34 F.2d 252 (8th Cir. 1929); M.V. Moore & Co. v.
Gilmore, 216 F. 99, 100-01 (4th Cir. 1914). In each of these decisions, investors
exchanged shares of stock for other security interests, notes, or real property, all at
a time when the corporations were insolvent. The courts held that the exchanges
constituted fraudulent transfers because the stock returned to the corporations as
part of the exchange was, at that time, virtually worthless due to the corporate
insolvency. As such, the corporations received “less than a reasonably equivalent
value.” See Roco Corp., 701 F.2d at 982; Schafer, 456 F.2d at 16-18; Lytle, 34
F.2d at 253-54.
The Trustee contends that these decisions should apply here because the
Debtors were all insolvent at the time the transfers to the investor defendants were
made, and any such transfers served only to redeem their worthless equity
interests. We disagree, and find the argument to be unpersuasive for the simple
reason that none of these decisions involved Ponzi schemes. Stated differently,
none of the stockholders in those cases were fraudulently induced into making
their initial investments so that none possessed fraud claims that would be
7
satisfied in whole or in part by virtue of the later transfers. Each case involved a
situation in which an insolvent corporation attempted to pay off its shareholders at
the expense of creditors, without receiving any value in return and with no regard
for satisfying any possible antecedent debts. While we agree with the reasoning of
Roco Corp., Schafer, Lytle, Gilmore and their progeny, these decisions are simply
not relevant to the present case.
In sum, the Trustee asks the court to focus solely on the form of the
investment to the exclusion of all other factors, and to ignore the realities of how
Ponzi schemes operate. As the bankruptcy court correctly noted, however, no
court to date has applied this form over substance rule in fraudulent transfer
actions involving Ponzi schemes. More specifically, no court has distinguished
between equity investments and debt-based claims when applying the general rule
to fraudulent transfer actions arising out of a Ponzi scheme. To the contrary, the
Ninth Circuit – the only court of appeals to address this issue to date – applied the
general rule to equity investors in a Ponzi scheme, and rejected any attempts to
distinguish between the forms of the investment. AFI Holding, 525 F.3d at 708-
09.
The debtor in AFI Holding operated a Ponzi scheme through which
investors purchased equity interests in various limited partnerships. One of the
investors, Keith McKenzie, received payments during the operation of the scheme
8
consisting of a return of his $73,400 limited partnership investment, and $16,424
in fictitious profits. 525 F.3d at 702. During the bankruptcy proceeding, the plan
trustee sought to avoid the transfers to McKenzie as fraudulent transfers under
§544(b) and California law. The bankruptcy court found that the transfers were
not “for value” and granted the plan trustee’s motion for summary judgment. The
district court reversed in part, finding that the transfers up to the principal amount
of McKenzie’s investment were “for value” because they were received in
satisfaction of McKenzie’s restitution claim. The district court then remanded to
the bankruptcy court to determine whether the transfers had been made in good
faith. Id.
The Ninth Circuit affirmed. The court emphasized that the limited partners
in AFI Holding “were defrauded into their limited partnership role by the operator
of the Ponzi scheme.” 525 F.3d at 708. The AFI debtors operated the Ponzi
scheme before McKenzie made his principal investment, and the Ponzi scheme
continued to exist well before any transfers were made back to him. Accordingly,
McKenzie “acquired a restitution claim at the time he bought into [the] Ponzi
scheme, . . . [and] [i]t is this restitution claim, in toto, that McKenzie exchanged
when AFI returned McKenzie’s principal ‘investment’ amount.” 525 F.3d at 708.
“Although circumstances of the exchange were cloaked in terms of a partnership
interest, [we have looked] beyond the ‘form’ to the ‘substance’ of the transaction.”
9
Id. Whether the debtor was insolvent at the time was irrelevant. The fact that
McKenzie and the other investors held equity interests was also of no moment.
The general rule applies in a Ponzi scheme setting regardless of whether good
faith investors have an equity interest in, or some other form of claim against, the
legal entity constituting the instrument of the fraud. We agree with that analysis
and the result.
Virtually identical facts are presented in this case. The Trustee agrees that
the investor defendants purchased limited partnerships from the Debtors at a time
when the Ponzi scheme was already in operation and a claim for fraud or
restitution was created in favor of the investors based on the Debtors’ fraudulent
activity. Under AFI Holding and the general rule, later transfers from the Debtors
up to the amount of the investment satisfied the investor defendants’ restitution or
fraud claims and provided value to the Debtors.
The bankruptcy court’s denial of the Trustee’s motion for partial summary
judgment is AFFIRMED.
10