Berman v. Pavano (In re Michael S. Goldberg, LLC), Case No. 09-23370

• Decision Date: 28 August 2020
• Docket Number: Adv. Pro. No. 11-02071,Case No. 09-23370
• Citation: 623 B.R. 225
• Court: U.S. Bankruptcy Court — District of Connecticut
• Parties: IN RE: Michael S. GOLDBERG, LLC and Michael S. Goldberg, Debtors. James Berman, Chapter 7 Trustee for the Estates of Michael S. Goldberg, LLC and Michael S. Goldberg, Plaintiff, v. Carl Pavano, et al. Defendants.

623 B.R. 225

IN RE: Michael S. GOLDBERG, LLC and Michael S. Goldberg, Debtors.James Berman, Chapter 7 Trustee for the Estates of Michael S. Goldberg, LLC and Michael S. Goldberg, Plaintiff,

v.Carl Pavano, et al. Defendants.

Case No. 09-23370

Adv. Pro. No. 11-02071

United States Bankruptcy Court, D. Connecticut.

Signed August 28, 2020.

James Moriarty, ZEISLER & ZEISLER, P.C., 10 Middle Street, 15th Floor, Bridgeport, Connecticut 06604, Attorney for the Plaintiff

Mark H. Dean, MARK H. DEAN, P.C., 241 Main Street, Hartford, Connecticut 06106, Attorney for the Defendant Roland LaBonte

MEMORANDUM OF DECISION AFTER TRIAL

Julie A. Manning, Chief United States Bankruptcy Judge

I. INTRODUCTION

On December 10, 2018, a trial was held on the amended complaint (the "Amended Complaint") filed by James Berman, the Chapter 7 Trustee (the "Plaintiff"), as it pertains to the Defendant, Roland G. LaBonte ("Roland LaBonte"). The Amended Complaint alleges that Roland LaBonte, through his son Scott A. LaBonte ("Scott LaBonte"), invested $300,000.00 in a Ponzi scheme operated by the Debtors. Pursuant to 11 U.S.C. §§ 548(a)(1)(A), 544(b)(1), and Conn. Gen. Stat. § 52-552e(a)(1), the Amended Complaint seeks to avoid a transfer in the amount of $425,000.00 that Roland LaBonte received for the $300,000.00 investment in the Ponzi scheme (the "LaBonte Transfer"). The Amended Complaint also seeks to recover and preserve the LaBonte Transfer pursuant to 11 U.S.C. §§ 550(a) and 551, and Conn. Gen. Stat. § 52-552h(a). In his answer (the "Answer"), Roland LaBonte asserts that he provided value in return for the LaBonte Transfer, that he did not have knowledge of the Ponzi scheme at the time he received the LaBonte Transfer, and that he received the LaBonte Transfer in good faith.¹

On December 10, 2018, a trial was held on the Amended Complaint. The Plaintiff called Scott LaBonte and Roland LaBonte as witnesses. The Plaintiff's Exhibits A, B, C, G, H, I, J, K, L, M, N, O, and P were admitted as full exhibits.² At the conclusion of the trial, the parties were instructed to file proposed findings of fact and conclusions of law supported by the evidence introduced at trial. The parties filed their respective proposed findings of fact and conclusions of law on February 8, 2019. See ECF Nos. 220, 221. For the reasons that follow, judgment will enter in favor of the Plaintiff and against the Defendant Roland LaBonte on Counts One and Two of the Amended Complaint.

II. JURISDICTION

The United States District Court for the District of Connecticut (the "District Court") has jurisdiction over this matter pursuant to 28 U.S.C. § 1334(b). The Bankruptcy Court derives its authority to hear and determine this matter pursuant to 28 U.S.C. § 157(a) and the Order of Reference of the District Court dated September 21, 1984. This matter is a "core proceeding" pursuant to 28 U.S.C. §§ 157(b)(1), (b)(2)(A) and (b)(2)(H).

III. FINDINGS OF FACT AND CONCLUSIONS OF LAW

Pursuant to Federal Rule of Civil Procedure 52, made applicable to this adversary proceeding by Federal Rule of Bankruptcy Procedure 7052, below are the Court's findings of fact and conclusions of law.

A. FINDINGS OF FACT

The Goldberg Ponzi Scheme

1. For a period of about twelve years, Michael S. Goldberg ("Goldberg") and Michael S. Goldberg, LLC (which at times used the name Acquisitions Unlimited Group ("AUG")) (collectively the "Goldberg Debtors"), operated a pure Ponzi scheme (the "Goldberg Scheme"). See Pl.'s Ex. P at 3-4.³ The Goldberg Scheme did not involve any legitimate, actual business, or investment activity by the Goldberg Debtors. See id. at 4-5.

2. The Goldberg Scheme offered investors consistent returns on investment through two types of business deals: 1) "Diamond Liquidation Deals"; and 2) "Chase Asset Deals." See Pl.'s Ex. P at 14. As the Goldberg Scheme expanded, the Goldberg Debtors phased out the Diamond Liquidation Deals and came to rely more heavily on the Chase Asset Deals. See Pl.'s Ex. G at 10.

3. The Chase Asset Deals purportedly gave the Goldberg Debtors the contractual right to purchase foreclosed construction equipment from Chase Manhattan Bank at a deep discount that the Goldberg Debtors would then resell, in prearranged sales, to large companies at huge profits. See Pl.'s Ex. P at 14. The Goldberg Debtors also claimed that the Chase Asset Deals required Chase Manhattan Bank to refund the full amount of the purchase price of the foreclosed construction equipment if the Goldberg Debtors were unable to resell the equipment. See Pl.'s Ex. G at 11; see also Pl.'s Ex. P at 19.

4. In contracts with investors in the Chase Asset Deals (the "Chase Contract(s)"), Goldberg, acting on behalf of the Goldberg Debtors, represented that he would use investor funds to buy foreclosed or seized properties for resale and give investors back their initial investment plus a 20% profit margin after a period of 90 days. See Pl.'s Ex. G at 10-11; Pl.'s Ex. P at 15. One investor in the Chase Asset Deals was Roland LaBonte's cousin-in-law, Edward Malley ("Malley"). See Pl.'s Ex. P at 26.

5. The term of the Chase Contracts was generally 90 days. Several investors reinvested all of the proceeds from earlier investments into one or more subsequent Chase Contracts so that the effective annual returns would be substantially in excess of 100% because of compounded profits.⁴ In many of the Chase Contracts, Goldberg represented that he, not the investor, would be responsible for paying any income tax owed by the investors on the profits generated by the resale of the equipment. See Pl.'s Ex. P at 16.

6. The only revenues generated by the Goldberg Scheme were funds the Goldberg Debtors collected from a succession of new investors, which were then used to repay the earlier investors their original investment. See Pl.'s Ex. P at 4-5.

7. As word of high returns spread, an increasing number of people invested in the Goldberg Scheme. See Pl.'s Ex. P at 16-17. The increased investment activity was largely attributable to "feeders." See id. These feeders located new investors and were compensated by the Goldberg Debtors for doing so through the payment of a "finder's fee"; in some instances, a feeder received a finder's fee of up to 10% on investments made by the new investor. Pl.'s Ex. G at 11; Pl.'s Ex. P at 16-17. In other instances, instead of a finder's fee, a "loan fee" was charged by the feeder which was taken out of the third-party investor's funds before the funds were invested in the Goldberg Scheme. Pl.'s Ex. P at 17. Malley was a feeder in the Goldberg Scheme. See id. at 20-21. Scott LaBonte was also a feeder in the Goldberg Scheme. See Pl.'s Ex. I at 4; PL.'s Ex. P at 31; see also Tr. 61:4-7.

8. Malley received the largest sums of money for investment in the Goldberg Scheme from Scott LaBonte. Pl.'s Ex. P at 28. All of the money Scott LaBonte provided to Malley was invested with the Goldberg Debtors. Pl.'s Ex. P at 29.

9. Between July 15, 2005 and September 16, 2008, Malley directly invested $1,285,000.00 of his own money in the Goldberg Scheme, and invested $3,934,500.00 he solicited from third parties as a feeder in the Goldberg Scheme. Pl.'s Ex. P at 20. Malley turned these funds over to the Goldberg Debtors through an Interest On Lawyer Trust Account of the law firm Kablick & Leary, P.C., which was managed by Jon C. Leary⁵ , Malley's attorney, on Malley's behalf (the "IOLTA Account"). See Pl.'s Ex. P at 20-21.

10. The majority of the payments Malley received from the Goldberg Debtors were paid through the IOLTA Account. Pl.'s Ex. P at 21. Between July 17, 2008 and November 4, 2009, the Goldberg Debtors transferred $12,366,000.00 to the IOLTA Account, which was then distributed either to Malley, or at Malley's direction, to third parties who had provided funds to him to invest in the Goldberg Scheme. Pl.'s Ex. P at 21-22.

Scott LaBonte's involvement in the Goldberg Scheme

11. Scott LaBonte first became involved in the Goldberg Scheme in 2005. He had several lunches with Malley during which Malley explained the Goldberg Debtors' business model, described earning rates of return of 80% to 85% on investments, and asked if Scott LaBonte would be interested in investing. Pl.'s Ex. P at 28. Scott LaBonte admitted to performing little due diligence before investing in the Goldberg Scheme. Id.

12. On or about January 16, 2006, Scott LaBonte began to invest money in the Goldberg Scheme through Malley.⁶ In general terms, the investments involved Scott LaBonte loaning money to Malley in exchange for Malley executing a promissory note in favor of Scott LaBonte. Pl.'s Ex. P at 29. In total, Malley executed six promissory notes payable to Scott LaBonte for money Scott LaBonte invested in the Goldberg Scheme. Id. 13. On January 16, 2006, Scott LaBonte invested $100,000.00 of his own money in the Goldberg Scheme through funds given to Malley. Pl.'s Ex. P at 29. On that date, Malley signed a promissory note to Scott LaBonte in the amount of $100,000.00 plus 12% interest payable within 45 days. Pl.'s Ex. P at 29. The January 16, 2006 promissory note also provided for a $10,000.00 loan fee payable to Scott LaBonte upon execution of the note. Id. The promissory note was governed by Connecticut law. Id. at 30. The promissory note was timely repaid within the 45 days (on or about March 2, 2006). See id.

14. After repayment of the first promissory note, Scott LaBonte attended a dinner meeting with Goldberg and Malley because he wanted to know more about how his investment was being put to use. Pl.'s Ex. P at 30. At the meeting, Goldberg explained that his purported business – the "business" upon which the Goldberg Scheme was based – involved purchasing foreclosed assets at a significant discount. Id. Scott LaBonte did not request that Goldberg, Goldberg's accountant, or Goldberg's attorney provide him with any financial statements or tax returns that supported Goldberg's representations. Scott LaBonte also did not seek information about...