In re Baker & Getty Financial Services, Inc.
| Decision Date | 24 May 1988 |
| Docket Number | Adv. No. 87-0043.,Bankruptcy No. B87-00074-Y |
| Citation | 88 BR 792 |
| Parties | In re BAKER & GETTY FINANCIAL SERVICES, INC., Baker & Getty Diversified, Inc., Baker & Getty Securities, Inc., Philip Cordek, and Suzan Bierman Cordek, Debtors. Carl D. RAFOTH, Trustee, Plaintiff, v. Dr. Frank BAILEY, et al., Defendants. |
| Court | U.S. Bankruptcy Court — Northern District of Ohio |
Carl D. Rafoth, Ohio, trustee/plaintiff.
Russell A. Kelm, Daniel R. Swetnam, Columbus, Ohio, for plaintiff/trustee Carl D. Rafoth.
James W. Ehrman, Youngstown, Ohio, for defendant Gregg DeSilvio.
Harry Hanna, Cleveland, Ohio, for Stewart Mandel.
Ronald L. Wollett, Columbus, Ohio, for defendant Frank Machinsky.
Ronald M. Rubenstein, Cleveland, Ohio, for defendant Mark Frissora.
Warren "Bo" Pritchard, Youngstown, Ohio, for defendants Gene Checcone and Dr. David Ritchie.
David A. Skrobot, Columbus, Ohio, for defendants Daniel A. and John D. Schwenker.
Conrad J. Morgenstern, Cleveland, Ohio, U.S. Trustee.
This cause is before the Court upon the Trustee's Amended Complaint to recover property of the estate by avoiding allegedly improper transfers. Summary judgment was granted against certain defendants on January 6, 1988, and the Trustee has resolved the claims against certain other defendants by settlement. Consequently, at the time of trial, the only claims awaiting a determination by this Court were those involving DR. DAVID RITCHIE, ("DR. RITCHIE"), DANIEL SCHWENKER ("D. SCHWENKER"), and JOHN SCHWENKER ("J. SCHWENKER"). A trial was commenced on January 11, 1988, and was concluded on January 14, 1988. This is a core proceeding brought pursuant to 28 U.S.C. Sec. 157(b)(2)(F), (H).
BAKER & GETTY FINANCIAL SERVICES, INC., ("BGFS") was incorporated in August 1985 to operate as a full-service financial brokerage firm. It appears that STEVEN MEDVED and PHILIP CORDEK assumed the primary duties of organizing the business after it was initially incorporated. Neither of them was licensed to engage in securities transactions. Sometime in September 1985, D. SCHWENKER, who was licensed to engage in securities transactions, was hired to assist the organization and operation of the business. In December 1985, MR. MEDVED formed BAKER & GETTY DIVERSIFIED, INC. ("BGD"), which was intended to obtain and loan funds to BGFS and to develop real estate investment opportunities for customers of the brokerage firm. In May 1986, BAKER & GETTY SECURITIES, INC., ("BGS") was formed to replace both BGFS and BGD, in part because of the many problems encountered in licensing BGFS as a securities firm. D. SCHWENKER was both an officer and director of BGS. None of the Debtor companies actually conducted any business or had a source of income other than the funds which were obtained from the Defendants and by others similarly situated, either as an equity investment in BGFS or for the intended purchase of securities in the open market.
To attract business, investors were told that CORDEK's uncle, who resided in New York, had access to large blocks of common stock available for sale at a discount. The investors were told that, if purchased by them, the stock would be immediately sold at a profit and they would receive a substantial return on their principal investment. In reliance on these representations, Defendants and several other individuals sought to take advantage of these alleged investment opportunities by paying various sums to BGFS. It appears that D. SCHWENKER was given the opportunity to participate because he had not been paid the salary or benefits which CORDEK had promised to him when hired. On January 7, 1986, D. SCHWENKER tendered Twenty-Three Thousand, Two Hundred & 00/100 Dollars ($23,200.00) to CORDEK in order to participate in the alleged "block buys" of securities through CORDEK's uncle's contact. D. SCHWENKER subsequently received the return of his Twenty-Three Thousand, Two Hundred & 00/100 Dollar ($23,200.00) principal undertaking, along with a profit1 of Sixty-Six Thousand, Four Hundred Fifty-Six & 93/100 Dollars ($66,456.93).2
J. SCHWENKER, D. SCHWENKER's father, received two different transfers from the Debtors. On February 6, 1986, J. SCHWENKER wire-transferred Four Hundred Ninety-Five Thousand & 00/100 Dollars ($495,000.00) to BGFS. Less than a month later, from February 24-26, J. SCHWENKER received a total return of both principal and profit of Six Hundred Fifty Thousand, One Hundred Five & 20/100 Dollars ($650,105.20) on his investment. This amounted to an annual return in excess of 620 percent. Subsequently, on March 25, 1986, J. SCHWENKER wire-transferred Five Hundred Thousand & 00/100 Dollars ($500,000.00) to BGFS for another "block buy" and received a total return of both principal and profit of Six Hundred Forty-Nine Thousand, Nine Hundred Eighty-One & 80/100 Dollars ($649,981.80).3 Similarly, DR. RITCHIE realized profits of Thirty-Seven Thousand, Four Hundred One & 62/100 Dollars ($37,401.62) in his dealings with the Debtor companies. No stock was ever actually purchased and all returns realized by the three Defendants were financed by the money received from newly attracted investors — a typical "Ponzi" scheme.4 By November 1, 1986, various investors appear to have been defrauded of an estimated 2.5 Million & 00/100 Dollars.
The Trustee asserts that all profits and principal payments made by these Defendants ought to be recovered on the grounds that the payments constituted (1) preferential transfers voidable under Sec. 547(b) of the Code; or (2) fraudulent conveyances voidable under Sec. 548(a)(2) of the code; or (3) fraudulent conveyances voidable pursuant to Chapter 1336 of the Ohio Revised Code (the Uniform Fraudulent Conveyances Act).
From the evidence, it appears that DR. RITCHIE received a total return of Forty-Eight Thousand, Six Hundred Seventy-Six & 00/100 Dollars ($48,676.00) on original investments totalling Twenty-Two Thousand, Two Hundred Seventy-Four & 38/100 Dollars ($22,274.38). The original investment amount represents proceeds of sale of certain securities DR. RITCHIE turned over to BGFS for sale and reinvestment. BGFS sold the securities through a registered broker-dealer with which it had a working relationship. The Trustee seeks to recover from this Defendant the sum of Thirty-Seven Thousand, Four Hundred One & 62/100 Dollars ($37,401.62) as a fraudulent conveyance pursuant to 11 U.S.C. Sec. 548(a)(2).5 In order to prevail on a fraudulent conveyance claim under Sec. 548(a)(2), three elements must be shown. First, the Debtor must have an interest in the property transferred. Second, the transfer must have been made within one year before the date of the filing of the Petition. Finally, the Debtor must have been insolvent when the transfer was made and received less than a reasonably equivalent value in exchange for such transfer.
There is no doubt that the Debtor had an interest in the funds transferred. In re Independent Clearing House Co., 41 B.R. 985, 999 (Bankr.D.Utah 1985). The conclusion that the transfers occurred while the Debtor was insolvent is supported by the testimony that Debtor Companies never conducted a business and that all funds Debtors ever had came from investors or persons believing they were purchasing securities on the open market. In re Independent Clearing House Co., 41 B.R. 985, 1011 (Bankr.D.Utah 1985). The evidence shows that the transfers occurred within one year of the filing of the Petition. The only question is whether the Debtors received less than a reasonably equivalent value in exchange for the transfers. This Court subscribes to both the reasoning and conclusion reached by the District Court on appeal of the Bankruptcy Court decision in In re Independent Clearing House Co., 77 B.R. 843 (D.Utah 1987) (en banc) on this issue. The court wrote:
From the time a defendant entrusted his money to the debtors, he had a claim against the debtors for the return of his money. . . . Thus, to the extent the debtor\'s payments to defendant merely repaid his principal undertaking, the payment satisfied an antecedent `debt\' of the debtors and the debtors received `value\' in exchange for the transfers. Moreover, to the extent a transfer merely repaid defendant\'s undertaking, the debtor received not only a `reasonably equivalent value\' but the exact same value — dollar for dollar. We therefore hold that such transfers are not avoidable under Sec. 548(a)(2).
Id. at 857. Thus, the Debtors received a "reasonably equivalent value" in exchange for all transfers to DR. RITCHIE that did not exceed his principal undertaking but, to the extent he received more than he gave the Debtors, the Debtors did not receive a reasonably equivalent value. DR. RITCHIE is therefore liable to the Trustee for any amount he received over his principal investment of Twenty-Two Thousand, Two Hundred Seventy-Four & 38/100 Dollars ($22,274.38).
The Trustee also argues that the transfers are avoidable under Sec. 544(b) in that an unsecured creditor could avoid them under the Ohio Fraudulent Conveyances Act.6 The Trustee's argument is based upon Ohio Rev.Code Sec. 1336.04. This Section requires a creditor to prove that the transfers were made without "fair consideration." "Fair consideration" is defined in Ohio Rev.Code Sec. 1336.03, which reads:
For reasons previously discussed, we conclude that DR. RITCHIE gave "fair consideration," as defined in the Ohio Revised Code, for...
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