M & L Business Mach. Co., Inc., In re

• Citation: 84 F.3d 1330
• Decision Date: 29 May 1996
• Docket Number: Nos. 94-1087,94-1097,s. 94-1087
• Court: United States Courts of Appeals. United States Court of Appeals (10th Circuit)
• Parties: , 36 Collier Bankr.Cas.2d 996, 29 Bankr.Ct.Dec. 188, 13 Colo. Bankr. Ct. Rep. 210 In re M & L BUSINESS MACHINE COMPANY, INC., Debtor. Christine J. JOBIN, Trustee of the Estate of M & L Business Machine Company, Inc., Plaintiff-Appellee/Cross-Appellant, v. Perry S. McKAY, Defendant-Appellant/ Cross-Appellee.

Page 1330

84 F.3d 1330

64 USLW 2768, 36 Collier Bankr.Cas.2d 996,

29 Bankr.Ct.Dec. 188,

13 Colo. Bankr. Ct. Rep. 210

In re M & L BUSINESS MACHINE COMPANY, INC., Debtor.

Christine J. JOBIN, Trustee of the Estate of M & L Business

Machine Company, Inc., Plaintiff-Appellee/Cross-Appellant, v. Perry S. McKAY, Defendant-Appellant/ Cross-Appellee.

Nos. 94-1087, 94-1097.

United States Court of Appeals, Tenth Circuit.

May 29, 1996.

Rehearing Denied in No. 94-1087

July 16, 1996.

Craig A. Weinberg (Andrew C. Littman, with him on the briefs), Stevens, Littman & Biddinson, Boulder, Colorado, for Defendant-Appellant.

Christine J. Jobin (Dana M. Arvin and Charles F. McVay with her on the briefs), The Jobin Law Firm, Denver, Colorado, for Plaintiff-Appellee.

Before KELLY, SETH ^*, and HENRY, Circuit Judges.

HENRY, Circuit Judge.

This appeal concerns the investments made by the appellant Perry S. McKay in a pyramid or "Ponzi" scheme run by the debtor in bankruptcy, M & L Business Machine Company, Inc. ("M & L"). The appellee Christine J. Jobin, the bankruptcy trustee for M & L, brought an adversary proceeding against Mr. McKay seeking to recover a total of $43,500 in payments made to him in the ninety day period preceding the filing of the bankruptcy petition. Ms. Jobin argued that, under the Bankruptcy Code, the $43,500 paid to Mr. McKay was avoidable for several reasons and that the money should be returned to the bankruptcy estate for distribution to all creditors. In response, Mr. McKay argued that the payments constituted returns of a good faith investment for which M & L obtained reasonably equivalent value, that the payments were made in the ordinary course of business, and that, as a result, the trustee was not entitled to recover them.

After the resolution of cross-motions for summary judgment and a trial, the bankruptcy court concluded that the trustee was entitled to recover $22,000.00 from Mr. McKay under 11 U.S.C. § 547(b), which authorizes the avoidance of transfers through which a transferee obtains more than he or she would have received in a chapter 7 liquidation proceeding. The court also held that the trustee was entitled to recover the entire $43,500 from Mr. McKay under 11 U.S.C. § 548(a)(1) as transfers made with the intent to hinder or defraud creditors. However, the court rejected the trustee's claim under 11 U.S.C. § 548(a)(2), which concerns transfers for which the debtor receives less than reasonably equivalent value. The effect of the bankruptcy court's rulings was a $22,000 judgment in favor of the trustee on the § 547(b) claim, and a judgment of $43,500 in favor of the trustee on the § 548(a)(1) claim. The district court affirmed the bankruptcy court's decision in all respects. See Jobin v. McKay (In re M & L Business Mach. Co., 164 B.R. 657 (D.Colo.1994)).

Mr. McKay now challenges the district court's affirmance of the bankruptcy court's entry of judgment in favor of the trustee on her § 547(b) and § 548(a)(1) claims. In her cross-appeal, the trustee contends that the bankruptcy and district courts erred in rejecting her claim under § 548(a)(2). For the reasons set forth below, we affirm the decision of the district court.

I. BACKGROUND

In the mid-1980s, officers of the debtor M & L began running a Ponzi scheme. ¹ Using the company's legitimate operations as a computer sales and leasing company as a front, the M & L officers solicited investments by promising extremely high rates of return. Upon receiving money from investors, M & L issued promissory notes and paid the promised sums with postdated checks drawn on company accounts.

From June through September 1990, Mr. McKay invested a total of $207,500 in M & L on varying terms. He made an initial investment of $100,000 on June 19, 1990, receiving an unsecured promissory note offering a return of ten percent per month ($10,000) over a two year period. A week later, he invested an additional $7,500 on the same terms. Finally, on September 7, 1990, and again on September 10, 1990, Mr. McKay invested $50,000 in M & L. On the latter two investments, M & L promised Mr. McKay a return of nine percent per week ($4,000). At the time of each of his investments, Mr. McKay received postdated checks. He deposited nine of them, totaling $43,500.

On October 1, 1990, M & L filed a petition under chapter 7 of the Bankruptcy Code. The bankruptcy court converted the case to chapter 11 and appointed Ms. Jobin as trustee. After the Ponzi scheme was discovered, the trustee converted the case back to chapter 7 and filed adversary proceedings against M & L investors in which she sought to recover payments made by M & L prior to the bankruptcy petition. She filed the instant adversary proceeding against Mr McKay in September 1992 and asserted claims to recover the $43,500 under the preference, fraudulent transfer, and post-petition transaction provisions of the Bankruptcy Code. See 11 U.S.C. §§ 547, 548, and 549.

Mr. McKay and the trustee filed motions for summary judgment, which the bankruptcy court granted in part and denied in part. The court ruled that the trustee was entitled to recover $22,000 from Mr. McKay as an avoidable preference under 11 U.S.C. 547(b). ² The court rejected Mr. McKay's argument that the transfers from M & L had been made "in the ordinary course of business" and therefore were not subject to avoidance in light of § 547(c)(2). Additionally, the court found that although the trustee had established the elements of an avoidable transfer "to hinder, delay, or defraud" creditors under § 548(a)(1), there were controverted issues of material fact as to whether Mr. McKay had received the payments from M & L "in good faith," as that term is used in § 548(c), such that he could defeat the § 548(a)(1) claim. Finally, the court concluded that there were unresolved factual issues as to whether M & L had received "reasonably equivalent value" for the transfers to Mr. McKay and that, as a result, summary judgment was also not warranted on the trustee's claim to avoid the transfers under § 548(a)(2).

After denying summary judgment on the § 548(a)(1) and 548(a)(2) claims, the bankruptcy court heard evidence concerning the circumstances surrounding Mr. McKay's investments in M & L. The evidence established that Mr. McKay had substantial experience in financial matters. In particular, he studied business administration in college and operated a profitable construction business in California. At the time of the bankruptcy proceedings, Mr. McKay was the co-trustee of a family trust holding over $3,000,000 in assets. He operated an industrial park in Golden, Colorado, a commercial real estate business, and a farming and ranching business. When he began investing in M & L, Mr. McKay's portfolio included stocks and bonds--which he traded through several brokers--mutual funds, land, and promissory notes. He subscribed to several investment publications.

Mr. McKay testified that he learned of M & L though Dr. Alec Tsoucatos, an economics professor and former college president who informed him of the extremely high rates of return that M & L was offering and reported that he had profitably invested in M & L over the last five years. Mr. McKay acknowledged that shortly after his first payment to M & L, he learned that Dr. Tsoucatos, although not representing himself to be a broker, had received a commission for convincing him to invest.

After speaking with Dr. Tsoucatos, Mr. McKay visited M & L's corporate offices and spoke with two of its officers. In response to his inquiries about M & L's offering such high rates of return, the M & L officers stated that investors' cash payments allowed the company to obtain computer equipment at very low prices and then negotiate extremely profitable contracts with its customers. The officers reported that M & L had obtained contracts to provide equipment to a California school district and to several Fortune 500 companies. However, they said, concerns about confidentiality precluded them from disclosing the terms of specific contracts. The M & L officers also informed Mr. McKay that the company's use of private investors to provide financing allowed them to negotiate contracts more quickly, without the constraints imposed by conventional lenders. However, the officers also stated that the majority of their financing was obtained through conventional lenders.

Mr. McKay also testified to the bankruptcy court that, before investing in M & L, he reviewed audited financial statements (for 1988, 1989, and part of 1990) that M & L officers provided. He also reviewed sales projections for 1990 and biographical sketches of two of M & L's officers. The sketches indicated that neither officer had significant financial experience. Additionally, Mr. McKay did not attempt to verify any of the information in the financial statements. He neither examined any of the purported contracts with M & L customers nor attempted to contact any of the conventional lenders that the M & L officers had reported to be the source of most of the company's financing.

In his testimony before the bankruptcy court, Mr. McKay acknowledged that the first check that he received from M & L was returned for uncollected funds. After receiving notice of the returned check, Mr. McKay contacted a bank officer, who informed him that the matter would be discussed with M & L's president. Subsequently, Mr. McKay spoke to M & L's president, who assured him that the problem had been corrected. The check cleared after it was deposited a second time. Dr. Tsoucatos then advised Mr. McKay not to deposit M & L's checks until five days after the date on each check. Mr. McKay followed this advice and had no further difficulty in depositing M & L's checks.

During the bankruptcy proceedings, the trustee also introduced testimony from Mr. Ken Wester, a goldsmith and gemologist who had been solicited to invest in M & L but had declined. Mr. Wester had considerably...