Fisher v. Apostolou
| Decision Date | 09 September 1998 |
| Docket Number | No. 95-3762,95-3762 |
| Citation | 155 F.3d 876 |
| Parties | , Bankr. L. Rep. P 77,802, Comm. Fut. L. Rep. P 27,416 Lawrence FISHER, as Trustee of the Estate of Lake States Commodities, Inc., a/k/a Lake States, Inc., and as Trustee of the Estate of Thomas W. Collins, Plaintiff-Appellant, v. Louis APOSTOLOU, et al., Defendants-Appellees. |
| Court | U.S. Court of Appeals — Seventh Circuit |
John A. Simon, Lawrence Fisher (argued), Michael J. Hayes, Linda A. Green, Gardner, Carton & Douglas, Chicago, IL, for Debtor-Appellant.
Stephen B. Diamond, Lawrence W. Schad, David J. Philipps, Steven J. Tomiello, Beeler, Schad & Diamond, Chicago, IL, Edward T. Joyce, Arthur W. Aufmann (argued), Rowena T. Paras, Joyce & Associates, Chicago, IL, for Appellees.
Before CUDAHY, FLAUM, and DIANE P. WOOD, Circuit Judges.
Thomas W. Collins ran a bucket shop (a scam similar to a Ponzi scheme) for approximately ten years, along with a number of accomplices. After his fraud was detected, Collins disappeared, and both he and the principal corporate entity he had used for his bogus commodities business were forced into bankruptcy. (Collins later committed suicide after a botched bank robbery in San Diego.) This case presents the question whether claims that the defrauded investors have against the accomplices and against the futures commission merchant through which they conducted much of their business may be stayed for the duration of the bankruptcy proceeding. The bankruptcy court held that the trustee had standing to pursue the individual investors' claims and accordingly stayed their action in district court. See Apostolou v. Fisher, 188 B.R. 958, 962 & n. 4 (N.D.Ill.1995). On appeal, the district court found that the trustee did not have standing to assert those claims, because they were not "property of the estate" for purposes of Bankruptcy Code § 541, 11 U.S.C. § 541. (Unless otherwise noted, all statutory sections mentioned are from the Bankruptcy Code, Title 11, U.S.Code.) It therefore found that the investors' claims were not subject to an automatic stay under § 362, or to the § 105 injunction imposed by the bankruptcy court. Apostolou, 188 B.R. at 971-72. We agree with the first of those conclusions, but following, by and large, the reasoning of the Second Circuit in Bankers Trust Co. v. Rhoades, 859 F.2d 1096 (2d Cir.1988), we believe that the investors' claims are sufficiently related to property of the estate that their pursuit should be stayed pursuant to § 105 until the bankruptcy court has disposed of the trustee's claims based on the same underlying transactions. We therefore affirm in part and reverse and remand in part for further proceedings.
In 1984, Collins established Lake States as a corporation that would trade in commodities futures on its own account. That promise, however, was never fulfilled in any legitimate way. Neither Collins nor any of his colleagues--Daniel J. Collins, Edward M. Collins, James J. Collins, Patricia Collins, John Matthews, Bernard Miraglia, James Spentzos, and John R. Wade--ever registered with the Commodities Futures Trading Commission ("CFTC") as required by law. 7 U.S.C. §§ 1a, 6d, 6f, 6k, 6n. Instead, some time between 1984 and 1986, Collins and his accomplices began soliciting and accepting investments, which they converted to their own use through accounts at Gelderman, Inc., a registered futures commission merchant. (We shall occasionally refer to the accomplices, together with Gelderman, as the "Apostolou Defendants.") As with all such schemes, Lake States maintained the illusion of legitimacy and success by using funds from newer investors to pay "returns" to earlier investors. The CFTC smelled a rat in October 1989, which caused it to begin investigating the trading on Lake States' behalf at Gelderman. It learned that unusually large deposits and withdrawals had been taking place in the Lake States accounts at Gelderman: one account in Collins' name showed more than $3,148,000 in deposits and $3,574,000 in withdrawals from January to September 1989. At that point, however, the CFTC apparently took no action, and the scheme continued. In addition to the basic fraud, Collins and his accomplices gave their investor-victims "promissory notes" as receipts for their invested funds. The victims were told that the notes were a "legitimate way to structure investments to save on commissions" charged by Gelderman.
Everything unraveled in June 1994: Lake States became insolvent, Collins disappeared, the investors learned that they had been bilked, and the proceedings giving rise to the present appeal began. Some of the unfortunate investors filed involuntary bankruptcy petitions against Collins and Lake States, which by then had only some $2 million left of the $100 million they had taken in--hardly enough to satisfy the outstanding investor debt of about $64 million, not to mention any other obligations the two may have had. Another group, known as the "Apostolou Plaintiffs" (after Louis Apostolou, one of the defrauded investors), filed securities, commodities, and common law fraud suits against the Apostolou Defendants in federal district court. The ranks of the Apostolou Plaintiffs have now swollen to 244 named individuals and entities (according to the certificate of interest attached to their brief), who are suing individually, not as a class. The entire group of similarly situated investors numbers about 450. See generally Apostolou, 188 B.R. at 962-65.
The Apostolou Plaintiffs initially sued both the Apostolou Defendants and the two debtors in bankruptcy, Thomas Collins and Lake States. Before matters moved very far, however, and undoubtedly in recognition of the problems the automatic stay rule of § 362 posed for their claims against the two debtors, they voluntarily dismissed Collins and Lake States from their action. This move did not satisfy the trustee, who filed a "Complaint to Enforce the Automatic Stay, or in the Alternative, to Obtain Injunctive Relief" in the bankruptcy court. In his complaint, the trustee argued (a) that the Apostolou Plaintiffs' claims, including those against the Apostolou Defendants, were the property of the debtors' estates and subject to the § 362 automatic stay, and, in the alternative, (b) that the Apostolou Plaintiffs' claims were sufficiently "related to" those of the trustee to support a § 105 injunction against the Apostolou Plaintiffs, staying their lawsuits until the trustee completed his pursuit of the Apostolou Defendants.
The Apostolou Defendants disagreed, but Bankruptcy Judge Susan Sonderby was not convinced that their remaining claims were sufficiently distinct from the bankruptcy proceedings that they should be allowed to go forward. Instead, in an order dated October 21, 1994, she concluded that the trustee had satisfied the requirements for an injunction under § 105, finding that both parties were pursuing the same dollars from the same defendants to redress the same harms, that the trustee was substantially likely to prevail on the merits, that there was no adequate remedy at law to protect the debtors' estates from the Apostolou Plaintiffs' actions, that the debtors' estates would suffer irreparable harm in the absence of a preliminary injunction, that the Apostolou Plaintiffs would suffer no harm from such an injunction (except perhaps loss of any benefits of being in the running in a race to the courthouse), and that an injunction would not harm any public interest.
The bankruptcy judge also decided, however, that the claims filed by the Apostolou Plaintiffs were the property of the debtors' estates under § 541, and thus that they were under the control of the trustee for purposes of § 544 and covered by the automatic stay of § 362. She announced that the request for a § 105 injunction was moot, but then enjoined the Apostolou Plaintiffs under § 105 from pursuing their claims against the two debtors' estates "until an order is entered in the ... jointly administered bankruptcy cases terminating, modifying or annulling said stay." Record 34, at 2; see also Apostolou, 188 B.R. at 962. Upon their appeal pursuant to 28 U.S.C. § 158(a), the district court disagreed with the bankruptcy court. It found that the claims were not the property of the bankrupt estates, and that the trustee accordingly did not have standing to assert the Apostolou Plaintiffs' various claims. The court concluded that the Apostolou Plaintiffs were entitled to proceed because Lake States was a party to the fraud, not its victim, and thus, under the in pari delicto doctrine, could not sue the Apostolou Defendants (through the trustee). It reversed the judgment of the bankruptcy court and lifted the § 105 injunction.
If the Apostolou Plaintiffs were trying to sue the two debtors, it is beyond dispute that the action would fall within the terms of the § 362 automatic stay. The catch here is that they are suing third parties who are not in bankruptcy, and who allegedly committed various acts of fraud against them--nondebtor tortfeasors, as the Apostolou Plaintiffs label them. Even if the third parties--the Apostolou Defendants--injured Collins or the Lake States corporation, the Apostolou Plaintiffs argue that they too were injured independently by the same defendants, and they are therefore entitled to pursue their own actions outside of the umbrella of the bankruptcy proceeding.
We begin with a review of the kinds of claims that may be brought only by the trustee once a bankruptcy proceeding has begun. First, the trustee has the sole responsibility to represent the estate, by bringing actions on its behalf to marshal assets for the benefit of the estate's creditors. 11 U.S.C. § 323; In re Perkins, 902 F.2d 1254, 1257 (7th Cir.1990). Second, the trustee is also the only party who can sue to represent the interests of the creditors as a class. See Koch Refining v. Farmers...
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