Boston Trading Group, Inc. v. Burnazos

• Decision Date: 10 September 1987
• Docket Number: Nos. 87-1169,87-1170,s. 87-1169
• Citation: 835 F.2d 1504
• Parties: BOSTON TRADING GROUP, INC., et al., Plaintiffs, Appellees, v. Robert A. BURNAZOS, et al., Defendants, Appellants. BOSTON TRADING GROUP, INC., et al., Plaintiffs, Appellants, v. Robert A. BURNAZOS, et al., Defendants, Appellees. . Heard
• Court: U.S. Court of Appeals — First Circuit

Page 1504

835 F.2d 1504

BOSTON TRADING GROUP, INC., et al., Plaintiffs, Appellees, v. Robert A. BURNAZOS, et al., Defendants, Appellants.

BOSTON TRADING GROUP, INC., et al., Plaintiffs, Appellants, v. Robert A. BURNAZOS, et al., Defendants, Appellees.

Nos. 87-1169, 87-1170.

United States Court of Appeals, First Circuit.

Heard Sept. 10, 1987.

Decided Dec. 30, 1987.

Rehearing Denied Feb. 2, 1988.

Joel Z. Eigerman, P.C. with whom Ian Veitzer and McCormack & Putziger, Boston, Mass., were on brief, for Robert E. Burnazos, et al.

Michael A. Collora with whom Susan Hughes Banning and Hemenway & Barnes, Boston, Mass., were on brief, for Boston Trading Group, Inc., et al.

Before CAMPBELL, Chief Judge, GARTH, ^* Senior Circuit Judge, and BREYER, Circuit Judge.

BREYER, Circuit Judge.

These cross appeals raise questions about the meaning of key provisions in a Massachusetts statute forbidding fraudulent conveyances. Mass.Gen.Laws ch. 109A, Secs. 1-13 (1986). The statute, enacted in 1924, is a uniform state law that codifies both common and statutory law stretching

back at least to 1571 and the Statute of Elizabeth. 13 Eliz. c. 5 (1571); see 1 G. Glenn, Fraudulent Conveyances and Preferences, Secs. 58-62 (rev. ed. 1940). Because we disagree with the district court about the meaning of the statutory provisions, and for other, more technical reasons, we order a new trial.

I Background

A. Facts

The plaintiff in this case is the receiver of two companies, Boston Trading Group (BTG) and Northeast Investment Services (NIS), that managed pools of money for commodities investors. He has sued the defendant, Robert Burnazos, claiming that two men who owned and managed BTG and NIS, Richard Shaw and Theodore Kepreos, fraudulently conveyed to Burnazos money that rightfully belonged either to BTG and NIS or to investors in the commodity pools those companies managed. The Receiver's allegations can be roughly summarized as follows:

(1) In 1978, Burnazos and Shaw worked for (or owned) various companies that managed commodity pools. Burnazos had some reason to believe Shaw was dishonest, for customers complained about him.

(2) In 1979, Burnazos bought BTG for $200,000. In 1980, Shaw and Kepreos founded NIS, intending to obtain NIS investors' money dishonestly, which they accomplished by "churning" the investors' accounts (i.e., making unnecessary trades to obtain commissions). Burnazos knew (or should have known) about this dishonest activity.

(3) In October 1981, Burnazos sold BTG to Shaw and Kepreos at a price equal to 28 percent of the assets in the BTG pools (a price of about $1.6 million). Using money from the excessive commissions they had charged their NIS investors, Shaw and Kepreos gave Burnazos a $400,000 down payment. Shaw and Kepreos signed a note to Burnazos for the rest of the money, payable in 16 installments of approximately $73,000 each. Burnazos's only recourse for payment of the note was against the assets of BTG and NIS.

(4) After the sale, NIS stopped doing business, its customers having lost more than $3 million. In mid-December, Shaw and Kepreos paid Burnazos the first $73,000 installment. In late December, Burnazos learned that Shaw and Kepreos were taking large amounts of money from BTG's investors. In January, Burnazos learned that BTG had stopped doing business. He then brought a state court lawsuit against Shaw, Kepreos, BTG, and NIS, claiming that they had conspired to destroy the two companies, and thereby impaired his only security for payment of the note.

(5) On January 21, 1982, Burnazos, Shaw, and Kepreos settled the state court lawsuit for $400,000. Shaw and Kepreos paid Burnazos this sum with certified checks, most of which did not indicate who bought them. At least some, but perhaps not all, of the money for the checks came directly from BTG.

Burnazos acknowledged most of these facts, but he denied knowing anything of Shaw and Kepreos's dishonesty until after they had made the first $73,000 installment payment in December 1981.

B. Procedural Facts

In February 1982, apparently at the request of the Commodity Futures Trading Commission, Commodity Futures Trading Commission v. Northeast Investment Services, Inc., No. 82-0305-Mc (D.Mass. Feb. 5, 1982), the federal district court appointed Michael A. Collora temporary receiver of BTG and NIS. The court authorized Collora, as receiver, "to prosecute all claims ... and suits in equity on behalf of NIS and BTG." The Receiver subsequently brought several lawsuits, including the present one against Robert Burnazos.

The Receiver's basic claim in this lawsuit is that the transfers to Burnazos violated the Massachusetts Fraudulent Conveyance Act, Mass.Gen.Laws ch. 109A (1986). That is to say, the payment of $400,000 (as down payment for BTG) in October 1981, the payment of $73,000 (as first installment) in December 1981, and the payment of $400,000 Every conveyance made ... with actual intent, as distinguished from intent presumed in law, to hinder, delay or defraud either present or future creditors, is fraudulent as to both present and future creditors.

(as settlement of the state court suit) in January 1982 all (allegedly) violated two basic provisions of that Act. The first of these, Mass.Gen.Laws ch. 109A, Sec. 7 (1986), concerns 'actual fraud':

The second, Mass.Gen.Laws ch. 109A, Sec. 4 (1986) concerns 'constructive fraud':

Every conveyance made ... by a person who is or will be thereby rendered insolvent is fraudulent as to creditors without regard to his actual intent if the conveyance is made ... without a fair consideration.

This second provision must be read together with Mass.Gen.Laws ch. 109A, Sec. 3 (1986), which defines "fair consideration":

Fair consideration is given for property ... when in exchange for such property ... as a fair equivalent therefor and in good faith, property is conveyed or an antecedent debt is satisfied....

The court and the parties treated the payments separately. In respect to the $400,000 down payment made in October 1981:

(1) The trial court held there was not sufficient evidence of a Sec. 7 violation ('actual fraud') to allow the claim to go to the jury;

(2) The jury decided the Sec. 4 claim ('constructive fraud') in favor of Burnazos. It found (in a special verdict) that Burnazos had given fair consideration for the $400,000 down payment, i.e., he gave a "fair equivalent" in "good faith."

In respect to the $73,000 installment paid in December 1981 and the $400,000 settlement paid in January 1982:

(1) The trial court held there was not sufficient evidence of a Sec. 7 violation ('actual fraud') to allow the claim to go to the jury;

(2) The jury decided the Sec. 4 claim ('constructive fraud') in favor of the Receiver. In its special verdict, the jury said that the installment and settlement transfers were "made ... without a fair consideration" because Burnazos had not paid a "fair equivalent" in "good faith." We add that, in respect to the jury's award, it was not clear whether BTG, on the one hand, or Shaw and Kepreos, on the other, had transferred the money to Burnazos, for the transfers mostly took the form of certified bank checks without definite indication of who bought them. The jury did not identify the transferor; rather, it simply awarded the Receiver approximately $436,000.

Both sides have appealed this verdict. Basically, Burnazos says that the trial court's instructions in respect to Sec. 4 were wrong, and there must be a new trial. The Receiver says the instructions were adequate, but, he adds, if there must be a new trial, the jury should also consider the Sec. 7 issues, issues which, in his view, the trial court wrongly kept from the jury.

C. Legal Background

The reader may understand our decision in this case more easily by keeping in mind the following legal background.

1. The pattern of facts the Receiver alleges may seem to cry out for relief as a matter of simple justice, but the legal principles that most readily provide the necessary relief are not involved in this case. The suggested pattern is one in which B, with C's full knowledge, dishonestly takes money from A and gives it to C. It seems fair (given C's knowledge) that ordinarily A should be able to sue C for return of his money. The law of restitution has developed equitable principles that typically permit just this kind of suit. Thus, the Massachusetts courts treat an investment advisor's wrongful taking of his clients' money as an embezzlement, they impose a "constructive trust" upon these funds, and those who take such funds "with knowledge" must return them to the original owner. Mickelson v. Barnet, 390 Mass. 786, 790, 460 N.E.2d 566 (1984); see also Berry v. Kyes, 304 Mass. 56, 59, 22 N.E.2d 622 (1939); National Mahaive Bank v. Barry, 125 Mass. 20, 24 (1878); cf. Proctor v. Norris, 285 Mass. 161, 164, 188 N.E. 625 Similarly, if a person with knowledge of a theft takes money from the thief--even without any special trust relationship to the victim--that person must return the money to the victim when asked, for the courts impose a special equitable 'constructive trust' upon the proceeds. See generally Annotation, "Imposition of Constructive Trust in Property Bought with Stolen or Embezzled Funds, 38 A.L.R.3d 1354 (1971); 5 A. Scott, Scott on Trusts, Secs. 507-508.2 (3d ed. 1967).

(same if transferee should have known of breach of trust); see generally Restatement of Restitution Sec. 202.

In this case, however, we are concerned not with these well-established principles of restitution, but with Fraudulent Conveyance Law, a set of legal (not equitable) doctrines designed for very different purposes. See generally 1 G. Glenn, supra, Secs. 58-62. Given the existence of a remedy elsewhere in the law, it is not surprising that courts have seen no need to shape fraudulent conveyance law to provide relief in the typical case suggested by the fact pattern the Receiver alleges.

2. The fraudulent conveyance sta...