Agricultural Research and Technology Group, Inc., In re
| Decision Date | 05 December 1990 |
| Docket Number | No. 89-15416,PARTNERS-A,89-15416 |
| Citation | 916 F.2d 528 |
| Parties | 23 Collier Bankr.Cas.2d 1517, Bankr. L. Rep. P 73,652 In re AGRICULTURAL RESEARCH AND TECHNOLOGY GROUP, INC., a Hawaii corporation, Debtor. Thomas E. HAYES, Trustee, Plaintiff-Appellee, v. PALM SEEDLINGS, a Hawaii limited partnership; Grant-Buskett Management Corporation, individually and as general partner of the partnership; Robert B. Grant; Ruth M. Jasper, Trustee for the Ruth M. Jasper Revocable Living Trust; Florine A. Katz; Edwin Y.W. Fong; Nancy Foos; Jerome O.C.C. Leong; Joseph C.C. Leong; Lon D. Pierce; George A. Reich; John F. Smith; Myron F. Tethal; Marian F. Townsend; Nancy R. Weisner; and James W. Winters, individually and as limited partners of said partnership, Defendants-Appellants. |
| Court | U.S. Court of Appeals — Ninth Circuit |
Fred Paul Benco and Darryl Miyahira, Honolulu, Hawaii, for defendants-appellants.
Simon Klevansky and Elizabeth A. Kane, Gelber and Gelber, Honolulu, Hawaii, for plaintiff-appellee.
Appeal from the United States District Court for the District of Hawaii.
Before ALARCON and POOLE, Circuit Judges, and WILLIAMS, * District Judge.
The appellee, Thomas E. Hayes, is the bankruptcy trustee for the debtor Agricultural Research and Technology Group, Inc. ("Agretech"). He instituted this action against Palm Seedlings Partners-A ("Palm Seedlings-A"), its general partner Grant-Buskett Management Corporation ("Grant"), and its limited partners to avoid certain transfers from Agretech to Palm Seedlings-A, pursuant to 11 U.S.C. Sec. 544(b), Haw.Rev.Stat. Sec. 651C-4 and its common-law equivalent. We affirm.
Creditors of Agretech filed a petition for its involuntary bankruptcy on September 26, 1986. The trustee of Agretech commenced this action on June 30, 1987, to avoid certain transfers from Agretech to Palm Seedlings Partners-A. In this action, the trustee sought recovery of funds from the following defendants-appellants: 1) Palm Seedlings-A; 2) Grant; and 3) from the limited partners of Palm Seedlings-A, for the amount of monies distributed respectively to each.
The district court found that Agretech transferred monies in fraud of its creditors to Palm Seedlings-A by means of a "Ponzi" scheme. A Ponzi scheme is an arrangement whereby an enterprise makes payments to investors from the proceeds of a later investment rather than from profits of the underlying business venture, as the investors expected. The fraud consists of transferring proceeds received from the new investors to previous investors, thereby giving other investors the impression that a legitimate profit making business opportunity exists, where in fact no such opportunity exists. See Cunningham v. Brown, 265 U.S. 1, 44 S.Ct. 424, 68 L.Ed. 873 (1924).
The district court further found that Palm Seedlings-A was a transferee in bad faith. Accordingly, the district court avoided all transfers and ruled that the trustee could recover all monies from Palm Seedlings-A, and its general and limited partners. Because the district court determined that the transfer of funds from Agretech to Palm Seedlings-A greatly exceeded any value transferred from Palm Seedlings-A to Agretech, the district court alternatively ruled that the trustee could at least avoid and recover all transfers to the extent of the excess even if Palm Seedlings-A was not a transferee in bad faith.
Judgment was entered in favor of the trustee on September 15, 1988 for the full amount of all transfers and for prejudgment interest from the date the complaint was filed. The district court reserved for later determination whether prejudgment interest could be awarded from the date of the fraudulent transactions. Defendants moved for a reconsideration of the court's order granting plaintiff partial summary judgment.
After further briefing, the district court awarded prejudgment interest to the time of the transfers in question. A supplemental final judgment was entered on January 5, 1989, to reflect the additional prejudgment interest. The district court denied defendant's motion for reconsideration on February 22, 1989.
Judgment was entered pursuant to certification under Federal Rule of Civil Procedure 54(b). Therefore, the judgments entered did not dispose of all claims. Defendants
appealed from the final partial judgment, supplemental final partial judgment, and the orders denying reconsideration of final partial judgment and supplemental final partial judgment on March 22, 1989 and March 30, 1989, within the thirty day time limit prescribed by 28 U.S.C. Sec. 2107.
Agretech was a Hawaii corporation engaged in the business of producing, cultivating and marketing tropical foliage plants. Its operation in this case, which appears to, but may not reflect its overall scheme, was to accept and cultivate seeds from investors. The investors guaranteed a certain germination rate, and made a cash advance to Agretech to cover its cultivation costs. In turn, Agretech agreed to purchase the germinated seeds (seedlings) from the investor at a predetermined time for a predetermined amount. The amount, which guaranteed the investor substantial return on his investment, was greatly in excess of the costs of production, and had no apparent realistic connection with the marketability or market value of the seedlings.
On October 6, 1983, Agretech and Palm Seedlings-A agreed that Agretech would accept delivery in Honolulu of 8,000,000 "chamaedorea seifrizzi" (palm) seeds purchased by Palm Seedlings-A. Palm Seedlings-A paid $56,000.00 to a third-party seed broker for the seedlings. In return for Agretech's promise to cultivate and market the seedlings, Palm Seedlings-A agreed to advance Agretech $40,000.00 for anticipated cultivation expenses. The parties further agreed that Agretech would re-purchase the seedlings from Palm Seedlings-A for $225,000.00 fourteen months later.
The agreement was modified by an "Addendum" dated October 28, 1983, whereby Palm Seedlings-A was to purchase additional seedlings. Accordingly, the purchase price was increased to $229,000.00. Palm Seedlings-A also agreed to purchase additional seedlings if the germination rate fell below 65%, so that Agretech would be assured of a 65% germination rate with respect to the original quantity of seedlings purchased.
In November of 1983, only one-half of the expected amount of seedlings arrived in Honolulu. Palm Seedlings-A transferred its outstanding credit balance with the seed broker to Agretech. However, Agretech was unable to obtain equivalent seeds from another source.
The parties eventually agreed to apply the remaining credit balance with the original seed broker to another shipment of seeds from that broker. The next shipment from the seed broker was expected on May 1, 1984. In view of these new circumstances, the parties decided that Agretech would purchase one-half of the seedlings in December of 1984, and the other half in June of 1985.
Not only did the first shipment of seeds arrive late, but they were damaged in transit as well. In January of 1984, Agretech informed Grant that only 4% of the seeds from the first shipment had germinated at Agretech's facility at Waiahole. Eight months after planting, Robert Grant, an officer of Grant, inspected these seeds and found that the germination rate was approximately 2.6%.
Despite the low germination rate, Grant demanded that Agretech fulfill its obligation to pay the first purchase price of $114,750.00 on December 15, 1984, as previously agreed. Grant informed Agretech that Grant was soliciting some Palm Seedlings-A limited partners to invest in another partnership, and that Agretech paid the purchase price to Grant, although the value of the seedlings at the time approximately totalled only $5,200.00.
At the time of the first payment, Agretech had just received $5,000,000.00 in funds from another investor. Grant distributed Agretech's first payment to Palm
Seedlings-A. Palm Seedlings-A, in turn, distributed the transfer to its limited partners.
Agretech made payment to Palm Seedlings-A for the first shipment on December 17, 1984, one day before the arrival of the second shipment. The second shipment of seedlings arrived December 18, 1984, seven months after the expected delivery date of May 1, 1984. Some time after December 19, 1984, Agretech planted these seeds at its Waimanalo facility.
Upon an inspection of these seedlings on March 20, 1985, Robert Grant observed that "very few" seeds had sprouted. Notwithstanding this low germination rate, Grant demanded that Agretech transfer the second payment on June 1, 1985, as agreed. As was the case with the first transfer, Grant explained to Agretech that Grant wanted to syndicate another partnership, and that "timely payment of the final installment to Palms [Seedlings]-A will help us to expedite the complete funding of Palms-F."
Unlike the first transfer, however, Grant explicitly acknowledged to its limited partners that "funds expected by them [Agretech] to be available for purchase of the Seifrizii seedlings owned by Palms-A have not come in as rapidly as they projected ..." Eight days after this letter, Grant remitted to Agretech a check for $114,750.00 on behalf of Palm Seedlings-F. However, Grant syndicated Palms Seedlings-F for the purchase of kentia, not seifrizzi, palms.
On the same day Agretech deposited this check into its bank account, it wrote a check on that same account for $114,750.00 in full satisfaction of the second payment. Once again, Palm Seedlings-A distributed this amount to its partners. Subsequent to the transfers in...
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