In re 1Point Solutions, LLC, Case No. 06-5400 (Bankr. M.D. Tenn. 6/15/2009), Case No. 06-5400.

Decision Date15 June 2009
Docket NumberAdv. No. 08-366.,Case No. 06-5898.,Case No. 06-5400.,Case 06-5400.,Adv. No. 08-365.
PartiesIn re: 1POINT SOLUTIONS, LLC, Chapter 11, BARRY R. STOKES, Debtors. JOHN C. MCLEMORE, Chapter 11 Trustee, Plaintiff, v. GREENPEACE, INC. 401(k) SAVINGS PLAN, and CROSSLINSUPPLYCO., INC., PROFIT SHARING/SAVINGSPLAN, Defendants.
CourtUnited States Bankruptcy Courts. Sixth Circuit. U.S. Bankruptcy Court — Middle District of Tennessee
MEMORANDUM OPINION

KEITH M. LUNDIN, Bankruptcy Judge

A central policy of the Bankruptcy Code"equality of distribution among creditors"1—here collides with the statutory trust erected by the Employee Insurance Retirement Income Security Act of 1974 ("ERISA").2 Bankruptcy policy fares poorly because of the powerful limitation on a trustee's avoiding powers identified by the Supreme Court in Begier v. IRS.3

The issue on cross motions for summary judgment is whether the Chapter 11 trustee can recover as fraudulent conveyances under 11 U.S.C. § 548(a) and/or TENN. CODE ANN. § 66-3-305(a)(1) "phantom profits" paid by debtor, 1 Point Solutions, LLC, to Defendants from funds impressed with a statutory trust before receipt by the debtor. Under Begier, 1Point paid the Defendants with trust funds that were not property of the debtor for purposes of § 548(a), § 544(a) and § 66-3-305(a)(1). These transfers are not avoidable in this adversary proceeding4 and defendants are entitled to summary judgment. The following constitute findings of facts and conclusions of law. FED. R. BANKR. P. 7052.

FACTS

Plaintiff is the Chapter 11 trustee for 1 Point Solutions, LLC ("1Point") and Barry Stokes. 1Point was a "third-party administrator"5 of various types of benefit plans, including 401(k) retirement plans, flexible spending accounts ("FSA"), health savings accounts ("HSA"), health reimbursement accounts ("HRA") and dependant care accounts ("DCA").6 Many of these plans were governed by ERISA. By 2006, 1Point administered benefit plans for roughly 35,000 employee/participants from over 800 entities. Among these were 401(k) retirement plans relating to over 1,000 employees of approximately 55 entities. Barry Stokes was the sole owner and chief operating officer of 1Point.

1Point entered into a brokerage agreement with Mid-Atlantic Capital Corporation ("MACC") in 2001. MACC is a registered broker-dealer. An account was set up in the name of 1Point 401(k) with MACC. Separate accounts for individual benefit plans were not established. 1Point clients were instructed to make plan deposits to MACC. They did so to the tune of many millions of dollars through 2005. 1Point also maintained accounts at Regions Bank7 into which Cafeteria Plan funds were deposited along with other cash.

1Point was operated by Stokes as a Ponzi scheme.8 Client plan monies were embezzled by Stokes. Money from any one plan was indiscriminately used to repay participant claims under other plans and to cash out plans terminating their engagement with 1Point. The plan funds entrusted to 1Point were not invested. Instead, plan assets were commingled in accounts from which Stokes disbursed money according to his personal needs and desires, including payment of business expenses of 1Point.

False statements were regularly prepared by 1Point and distributed to plan participants representing that plan assets were invested. "[S]ophisticated 401(k) administration software"9 was used to apply daily rates of mutual fund performance to contribution and investment data of each participant, allowing 1Point to provide participants with regular (fake) performance reports. These reports reflected what might have been the earnings of plan participants had funds been invested.

When the 1Point/Stokes fraud collapsed in 2006, over $14.5 million in plan assets had been embezzled, misappropriated and converted by 1Point/Stokes.

1Point was third-party administrator for defendants Crosslin Supply Co., Inc., Profit Sharing/Savings Plan ("Crosslin Plan") and Greenpeace, Inc. 401(k) Savings Plan ("Greenpeace Plan") (collectively, the "Plans").

The Crosslin Plan is an ERISA qualified 401(k) defined contribution plan. The Crosslin Plan is funded by employee payroll deductions, participant rollover contributions, and by employer matching contributions.

Crosslin engaged 1Point as third-party administrator for the Crosslin Plan effective December 31, 2002. In that role, 1Point was to (1) provide an array of mutual funds that could be offered as investments under the Crosslin Plan; (2) implement participants' investment directions on a daily basis; (3) perform administrative services including enrollment, tracking contributions, distributions, loans and rollovers and providing quarterly account statements to participants.10

Between December 31, 2002, and January 15, 2003, Crosslin Plan assets of $1,579,308.88 were transferred to 1Point accounts. Contributions of participant payroll deductions and of Crosslin matching contributions were forwarded to 1Point through December 31, 2004.

Crosslin Plan terminated its engagement of 1Point effective December 31, 2004, and appointed Hartford Life Insurance Company as successor third-party administrator. On May 31, 2005 and June 2, 2005, at Crosslin's direction, funds totaling $2,241,695.62 and $56,042.39 were transferred to Hartford from 1Point on behalf of the Crosslin Plan. These amounts included the "principle" deposited by Crosslin Plan with 1Point, plus accumulated (nonexistent) "earnings" as reported to Crosslin Plan participants by 1Point.

Greenpeace, Inc. established the Greenpeace U.S.A. Savings Plan in 1997 to provide retirement benefits to its employees. The Greenpeace Plan is an ERISA qualified defined contribution plan. From February 2003 through May 31, 2005, 1Point provided third-party administrative services to the Greenpeace Plan.11 In 2005, Greenpeace terminated 1Point, and engaged Fidelity Investments as successor third-party administrator. On May 31, 2005, 1Point transferred $1,648,702.07 to Fidelity at the request of Greenpeace Plan. This amount included contributions forwarded by Greenpeace Plan to 1Point plus accrued "earnings" reported by 1Point in its (fake) quarterly reports.

During the years in which 1Point acted as third-party administrator, plan assets of both Crosslin Plan and Greenpeace Plan were commingled with the assets of other ERISA plans. Cafeteria Plan money also moved among 1Point accounts, was commingled and misappropriated.

Just prior to the cashing-out of the Crosslin and Greenpeace Plans, on May 23 and 24, 2005, Beck-Arnley 401(k) Plan,12 another of 1Point's clients, transferred to 1Point's account at MACC $6,080,363.24 in Beck-Arnley Plan assets.13 On the day the Beck-Arnley Plan assets were received, the balance in 1Point's MACC account was $6,199.71. The Beck-Arnley Plan assets were immediately used to cover the withdrawals demanded by Crosslin Plan and Greenpeace Plan. As explained in Stokes's plea agreement:

Two of the transactions dissipating Beck/Arnley funds occurred on May 31, 2005. On this date, [Stokes] sent an email to Mid-Atlantic Capital Group instructing Mid-Atlantic to transfer $1,648,702.07 from the 1Point Solutions account to an account . . . for the benefit of Greenpeace, Inc., as the Greenpeace 401(k) plan had been embezzled and its ERISA funds entirely dissipated by the defendant [Stokes] prior to May 2005.

On May 31, 2005, the defendant [Stokes] also sent an email to Mid-Atlantic Capital Group instructing Mid-Atlantic to transfer $2,241,695.62 . . . for the benefit of Crosslin Supply, another company whose entire 401(k) plan had been embezzled by the defendant prior to May 2005. In the months leading up to these transfers, both Greenpeace and Crosslin had been demanding the return of their ERISA plan funds. However despite such demands and the threat of legal action, the defendant had been unable to comply because he had embezzled and spent the entirety of both plan's [sic] funds.

(Stokes Plea Agreement at 25.)

Since no14 investments were made with Plan funds, the "profits" and "earnings" paid to the Crosslin and Greenpeace Plans were "phantom income" reported by 1Point to perpetuate the fraudulent scheme.

An involuntary bankruptcy petition was filed against 1Point on September 26, 2006. Orders for relief were entered against 1Point and Stokes personally on September 27, 2006. The Chapter 11 cases have been administratively consolidated. John McLemore was appointed Chapter 11 trustee in both cases.

Stokes was charged with 29 counts of embezzlement of ERISA funds, 21 counts of mail fraud, 11 counts of wire fraud, 11 counts of money laundering and four counts of criminal contempt. On September 9, 2008, Stokes entered into a guilty plea agreement.

The 1Point/Stokes Ponzi scheme has spawned much litigation in this court and in the U.S. District Court for the Middle District of Tennessee.15 Plaintiff commenced this action to avoid transfers of "phantom profits" to the Defendant Plans under 11 U.S.C. § 548(a) and under TENN. CODE ANN. § 66-3-305(a), Tennessee's fraudulent conveyance statute.

DISCUSSION
I. Summary Judgment Standard

Summary judgment is appropriate when "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." FED. R. CIV. P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S. Ct. 2548, 91 L. Ed. 2d 265 (1986); Booker v. Brown & Williamson Tobacco Co., 879 F.2d 1304, 1310 (6th Cir. 1989). The court is not to "`weigh the evidence and determine the truth of the matter but to determine whether there is a genuine issue for trial.'" Browning v. Levy, 283 F.3d 761, 769 (6th Cir. 2002) (quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249, 106 S. Ct. 2505, 91 L. Ed. 2d 202 (1986)). "A genuine issue for trial exists only when there is sufficient `evidence on...

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