Sender v. Simon
| Decision Date | 23 May 1996 |
| Docket Number | No. 94-1569,94-1569 |
| Citation | 84 F.3d 1299 |
| Parties | , Bankr. L. Rep. P 77,001, 13 Colo. Bankr. Ct. Rep. 176 Harvey SENDER, Trustee of the Bankruptcy Estates of Hedged-Investments Associates, Inc., Hedged-Securities Associates, LP, Hedged-Investments Associates, LP, and Hedged-Investments Associates II, LP, Plaintiff-Appellant, v. William E. SIMON; Baker Family Partnership I, Defendants-Appellees. |
| Court | U.S. Court of Appeals — Tenth Circuit |
John B. Wasserman (Bonnie A. Bell with him on the briefs), Katch, Sender & Wasserman, P.C., Denver, Colorado, for Plaintiff-Appellant.
David C. Warren (James E. Scarboro and Allison Hartwell Eid with him on the brief) Arnold & Porter, Denver, Colorado, for Defendants-Appellees.
Before BRORBY and McWILLIAMS, Circuit Judges, and KERN, * District Judge.
This case arises out of an elaborate and long-running Ponzi scheme. 1 As with all Ponzi schemes, this one collapsed and left many innocent investors with significant losses. The scheme was masterminded and operated by a man named James Donahue, whom a federal district court sentenced to federal prison for his role in the debacle. In his operation of the scheme, Mr. Donahue utilized a solely-owned corporation and three limited partnerships. The corporation served as the managing general partner of the three limited partnerships. The innocent investors in the scheme purportedly purchased limited partnership interests in the partnerships. Now that the scheme has collapsed, the corporation and the three limited partnerships are in bankruptcy under Chapter 7 of Title 11 of the United States Code.
Harvey Sender is the trustee in bankruptcy for the four bankrupt entities. William Simon and the Baker Family Partnership I (the "Baker Partnership") find themselves among what Mr. Sender calls the "lucky" group of innocent investors who managed to withdraw more money from the Ponzi scheme than they put into it. Mr. Sender has sued Mr. Simon and the Baker Partnership under Colorado partnership law to recover the money they received in excess of the money they contributed. Mr. Sender claims the excess payments represent fictitious profits to which the defendants are not entitled.
The district court entered summary judgment for Mr. Simon and the Baker Partnership after concluding the partnership agreements are not enforceable. We exercise jurisdiction under 28 U.S.C. § 1291 and affirm the district court.
In the late 1970s, Mr. Donahue formed a corporation named Hedged-Investments Associates, Inc. ("HIA Inc.") for the purpose of operating an investment fund known generally as Hedged Investments. Mr. Donahue attracted investors to the fund by claiming he had developed a sophisticated, computer-based strategy for trading in hedged securities options. He boasted annual returns of fifteen to twenty-two percent. When an individual agreed to invest in the fund, Mr. Donahue purported to sell him or her limited partnership interests in one of three limited partnerships: Hedged-Investments Associates, L.P. ("HIA L.P."), Hedged-Investments Associates II, L.P. ("HIA II L.P."), and Hedged-Securities Associates, L.P. ("HSA L.P.") (collectively the "Debtor Partnerships"). 2 HIA Inc. served as the managing general partner for each of the Debtor Partnerships. According to Mr. Donahue's representations, HIA Inc. would take the money invested in the partnerships and invest it in the Hedged Investments fund according to his trading strategies.
Mr. Donahue failed to maintain separate accounting records for the Debtor Partnerships and commingled investors' funds into a single checking account held in the name of HIA Inc. Though he maintained no records for the partnerships themselves, Mr. Donahue did establish individual investor accounts through HIA Inc. that allowed each investor to know the putative status of her or his investment in the Hedged Investments fund. In other words, Mr. Donahue treated the investors as if they were direct participants in a single investment pool instead of investors in discreet limited partnerships.
Mr. Donahue used invested funds to trade in securities options over the life of the operation, and his trading resulted in net profits in a few years, including 1989. However, in most years the Hedged Investments operation realized net trading losses, and in all years Mr. Donahue substantially overstated the fund's performance. From 1982 onward the fund was insolvent in that its cumulative losses exceeded its cumulative gains. To prevent investors from discovering the fund's poor performance, Mr. Donahue falsely reported high earnings. When an investor sought to withdraw money from his account on the basis of these reported earnings, Mr. Donahue--because the fund had no real cumulative earnings--apparently paid the withdrawal from the capital contributions of other investors.
The Hedged Investments operation collapsed in the summer of 1990. On August 30, 1990, Mr. Donahue caused HIA Inc. to file for voluntary bankruptcy pursuant to Chapter 11 of Title 11 of the United States Code. On September 7, 1990, the case was converted to a Chapter 7 bankruptcy, and the bankruptcy court appointed Mr. Sender as trustee for the estate of HIA Inc. On October 3, 1990, Mr. Sender, as trustee for HIA Inc., filed involuntary petitions for bankruptcy under Chapter 7 against the Debtor Partnerships. The bankruptcy court then appointed Mr. Sender as the trustee for the Debtor Partnerships and ordered the Debtor Partnerships' estates to be jointly administered with the HIA Inc. estate. On September 30, 1991, apparently because Mr. Donahue commingled partnership funds and generally disregarded the separate identity of each of the Debtor Partnerships, the bankruptcy court substantively consolidated the Debtor Partnerships for the purpose of administering the bankruptcy estate. According to Mr. Sender's financial expert, a reconstruction of each of the Debtor Partnerships, while possible, would have been impractical and unnecessary. Since all the investor contributions were commingled into a single investment fund, the value of each investor's account was determined by her or his pro rata share of the commingled fund--a valuation that would not change with a reconstruction of each Debtor Partnership.
Mr. Simon and the Baker Partnership both invested in the Hedged Investments fund through HSA L.P., a limited partnership formed under the Colorado Uniform Limited Partnership Act of 1981. Mr. Simon's relationship with HSA L.P. began in June 1988, when he executed a document entitled "Certificate and Articles of Limited Partnership for Hedged Securities Associates" and transferred $5 million into the Hedged Investments fund. This amount was his sole contribution to the fund. The Baker Partnership's relationship with HSA L.P. began in January 1989, when the managing partner of Baker executed a "Certificate and Articles of Limited Partnership for Hedged Securities Associates" and caused Baker to transfer $1.7 million into the Hedged Investments fund. Like Mr. Simon, this amount was the Baker Partnership's sole contribution to the fund. Mr. Simon's and the Baker Partnership's investment relationships with the Hedged Investment fund ended in August 1989, when each received lump sum checks signed by Mr. Donahue and drawn on a checking account held by "Hedged-Investment Assoc., Inc. III." Notations on the two checks indicated they were intended to terminate the "capital" accounts of Mr. Simon and the Baker Partnership. Mr. Simon received $6,220,957.86, which was $1,220,957.86 more than his original contribution. The Baker Partnership received $1,916,366.23, which was $236,366.23 more than its original contribution. The amounts in excess of the defendants' contributions apparently represented earnings that had been allocated to their accounts during their participation in the Hedged Investments fund. Aside from the lump sum payments, neither defendant received any other distributions from HSA L.P.
In December 1992, Mr. Sender brought separate suits in Colorado District Court, Arapahoe County, against Mr. Simon and the Baker Partnership. Mr. Sender's complaint in both cases alleged, inter alia, Mr. Simon and the Baker Partnership "received distributions in excess of their contribution" in violation of § 608(2) of the Colorado Uniform Limited Partnership Act of 1981, Colo.Rev.Stat. § 7-62-101, et seq. ("CULPA"). 3 Accordingly, Mr. Sender claimed the bankruptcy estate was "entitled to the return of the [excess distributions]." As already noted, Mr. Simon and the Baker Partnership received, respectively, $1,220,957.86 and $236,366.23, in excess of their contributions to the Hedged Investments fund.
In March 1993, Mr. Simon and the Baker Partnership, represented by the same counsel, removed the cases to the District Court for the District of Colorado, basing jurisdiction on diversity of citizenship. See 28 U.S.C. § 1332. The two actions were consolidated in June 1993. The district court decided the case on cross motions for summary judgment, granting summary judgment in favor of Mr. Simon and the Baker Partnership after determining the partnership agreements were not enforceable. Mr. Sender appealed.
The district court's jurisdiction over this case was based on diversity of citizenship under 28 U.S.C. § 1332. "A federal court sitting in diversity applies the substantive law ... of the forum state." Barrett v. Tallon, 30 F.3d 1296, 1300 (10th Cir.1994). Mr. Sender brought this suit under the substantive law of Colorado, and, as neither party disputes, Colorado is the forum state in this matter. Therefore, to the extent Colorado law governs this case, 4 we are bound by the most recent statements of Colorado law by the Colorado Supreme Court. Wood v. Eli Lilly & Co., 38 F.3d 510, 513 (10th Cir.1994). In the event "no state cases exist on a point, we turn to other 'state...
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