In re Afi Holding, Inc.

• Decision Date: 16 April 2008
• Docket Number: No. 06-55033.,No. 06-55070.,06-55033.,06-55070.
• Citation: 525 F.3d 700
• Parties: In re AFI HOLDING, INC., Debtor, Christopher R. Barclay, Successor Trustee, Appellant, v. Keith Mackenzie, Appellee. In re AFI Holding, Inc., Debtor, Keith Mackenzie, Appellant, v. Christopher R. Barclay, Successor Trustee, Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

525 F.3d 700

In re AFI HOLDING, INC., Debtor,

Christopher R. Barclay, Successor Trustee, Appellant, v. Keith Mackenzie, Appellee.

In re AFI Holding, Inc., Debtor,

Keith Mackenzie, Appellant, v. Christopher R. Barclay, Successor Trustee, Appellee.

No. 06-55033.

No. 06-55070.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted February 12, 2008.

Filed April 16, 2008.

David R. Weinstein, Sharon Z. Weiss, Weinstein, Weiss & Ordubegian LLP, Los Angeles, CA, for the appellant/cross-appellee.

Paul J. Laurin, Weiner & Laurin, LLP, Encino, CA, for the appellee/cross-appellant.

Appeal from the United States District Court for the Central District of California; Percy Anderson, District Judge, Presiding. D.C. Nos. CV-05-03232-PA, CV-05-04275-PA.

Before: STEPHEN S. TROTT, RICHARD R. CLIFTON, and CONSUELO M. CALLAHAN, Circuit Judges.

TROTT, Circuit Judge:

The bankruptcy court granted summary judgment in favor of the Trustee for Advance Finance Incorporated ("AFI"), avoiding transfers from AFI to Keith Mackenzie under CAL. CIV. CODE § 3439.04(a), and holding that the good faith exception to fraudulent transfers under CAL. CIV. CODE § 3439.08(a) was barred as a matter of law because no "reasonably equivalent value" was exchanged for the transfers. The district court reversed and remanded, holding that the good faith exception was not barred as a matter of law. We have jurisdiction pursuant to 28 U.S.C. § 158(d),¹ and we affirm.

I BACKGROUND

Keith Mackenzie, like many others, invested funds in AFI. AFI was operated by Gary Eisenberg who entered a guilty plea to federal securities and mail fraud charges in 2002 and is currently serving a 63-month prison sentence. In that plea, he conceded that he operated AFI as a Ponzi scheme—paying investors purported profits with funds raised from other investors.

Mackenzie invested $73,400 with AFI in 1995 and 1996 as a purported limited partner. In connection with his subsequent withdrawal from AFI, he received payments totaling $89,824.18 between 1996 and 1997. Of the total payments, $73,400 was a return of Mackenzie's principal investment. The rest, roughly $16,424, was a fictitious gain on the principal investment.

AFI's bankruptcy proceedings commenced on October 22, 2001. In October of 2003, the Trustee, Carolyn A. Dye, commenced adversary proceedings against approximately 170 of AFI's investors, including Mackenzie, to avoid transfers made to them by AFI.² The Trustee claimed avoidance and recovery of fraudulent transfers pursuant to 11 U.S.C. §§ 544(b) and 550 and CAL. CIV. CODE §§ 3439.04 and 3439.09.

The bankruptcy court granted the Trustee's summary judgment motion seeking to avoid transfers made by AFI to Mackenzie. Mackenzie appealed the judgment to the district court, which reversed in part. The reversal was limited to the amount of principal initially "invested" by Mackenzie. The district court reasoned that Mackenzie had exchanged his purported partnership interest for a proportionately reduced restitution claim, distinguishing the facts of the transaction from a simple receipt of money on account of an equity interest as a limited partner. The district court affirmed the bankruptcy court as to the remaining $16,424, the fictitious gain on Mackenzie's principal investment, as it was in excess of Mackenzie's restitution claim, and it was not transferred in connection with Mackenzie's withdrawal from the partnership.

The district court ordered the matter remanded to the bankruptcy court to determine whether Mackenzie had received the $73,400 transfer in good faith and to determine also how much, if any, prejudgment interest was payable to the Trustee.

The Trustee appeals, arguing that the debtor's estate is entitled to the entire amount transferred from AFI to Mackenzie, principal and the fictitious gain, as well as prejudgment interest. Mackenzie cross appeals, arguing that he is entitled to the entire amount transferred from AFI to him.

II DISCUSSION

A. Standard of Review.

We review de novo the district court's decision on an appeal from a bankruptcy court. In re Raintree Healthcare Corp., 431 F.3d 685, 687 (9th Cir.2005). Thus, we apply the same standard of review applied by the district court. Id. at 687. No deference is given to the district court's decision. In re Salazar, 430 F.3d 992, 994 (9th Cir.2005). Summary judgment is to be granted if the pleadings and supporting documents, viewed in the light most favorable to the non-moving party, show that there is no genuine issue as to a material fact and the moving party is entitled to judgment as a matter of law. FED. R. CIV. P. 56(c).

B. This is a Fraudulent Transfer Case.

As an initial matter, it is important to recognize that this case implicates only fraudulent transfer law. Our concern here is not the law of preferences under 11 U.S.C. § 547, because we are years removed from that section's ninety-day reach back period. See 11 U.S.C. § 547(b)(4)(A). Similarly, we are not concerned with the law of subordination under 11 U.S.C. § 510(b), because we are a step removed from distribution of the bankruptcy estate under § 510(b).³ See Wyle v. C.H. Rider & Family (In re United Energy Corp.), 944 F.2d 589, 597 (9th Cir.1991) ("United Energy"). Instead, this case is driven by California state fraudulent transfer law. As a result, our "analysis is directed at what the debtor surrendered and what the debtor received irrespective of what any third party may have gained or lost." Id. (emphasis added and internal quotation marks omitted).

C. Applicable Law.

An action to recover fraudulent transfers under 11 U.S.C. § 548(a)(1) of the Bankruptcy Code is time barred because the transfers from AFI to Mackenzie occurred more than one year before bankruptcy proceedings commenced.⁴ Section 544(b) of the Bankruptcy Code, however, allows a bankruptcy trustee to avoid any transfer of a debtor's property that would be avoidable by an unsecured creditor under applicable state law. See In re Acequia, Inc., 34 F.3d 800, 809 (9th Cir.1994). One creditor of any amount will suffice for the purposes of § 544(b). Id. at 809-10. In this case, at least one unsecured creditor existed, and CAL. CIV. CODE §§ 3439.04(a) and 3439.08(a) provide California state law allowing an unsecured creditor to reach the transfers made by AFI to Mackenzie in 1996 and 1997.

Where state statutes are similar to the Bankruptcy Code, cases analyzing the Bankruptcy Code provisions are persuasive authority. Hayes v. Palm Seedlings Partners-A (In re Agric. Research and Tech. Group, Inc.), 916 F.2d 528, 534 (9th Cir.1990) ("Agretech"). Here, California's fraudulent transfer statutes are similar in form and substance to the Bankruptcy Code's fraudulent transfer provisions. United Energy, 944 F.2d at 594. Compare 11 U.S.C. § 548(a)(1) with CAL. CIV. CODE § 3439.04(a) (allowing a transfer to be avoided when the debtor acted with "actual intent to hinder, delay, or defraud" an entity or creditor, or where indicia of constructive fraud are present); compare also 11 U.S.C. § 548(c) with CAL. CIV. CODE § 3439.08(a) (providing a safe harbor/good faith exception to transferees who took in good faith and for value).

D. Mackenzie's Cross-Appeal: The Transfer From AFI to Mackenzie was an Actually Fraudulent Transfer Under 548(a)(1)(A).

Mackenzie argues that he may be entitled to the entire transfer, including the fictitious gain made on account of his "investment." The thrust of that argument is that genuine issues of material fact exist as to whether AFI transferred the $89,824.18 to Mackenzie with the "actual intent to hinder, delay, or defraud" an entity or creditor under § 548(a)(1)(A). We do not find that argument persuasive.

We allow "a finding of fraudulent intent under section 548(a)(1) [the analog to § 3439.04(a)] on the basis of circumstantial evidence." Agretech, 916 F.2d at 534. Furthermore, "the mere existence of a Ponzi scheme" is sufficient to establish actual intent under § 548(a)(1) or a state's equivalent to that section. Id. at 535. Here, Eisenberg's plea demonstrates the existence of fraudulent intent and a Ponzi scheme, and Mackenzie failed to identify evidence in the record that created a genuine issue of material fact as to either issue. Eisenberg admitted the following in his plea:

Eisenberg solicited investors for partnerships knowing that the businesses of AFI, AFHI, and the partnerships were not profitable from inception. As early as 1996, Eisenberg knew that the factoring business of AFI, AFHI, and the partnerships had already incurred $4 million to $5 million in operating losses and that he was running a ponzi scheme, that is, paying investors purported interest payments with funds raised from other investors, rather than from the profits of the factoring business as Eisenberg represented to investors.

(emphasis added). Thus, the record shows Eisenberg's operation was a Ponzi scheme before Mackenzie "invested" in the partnership, well before the transfers were made from AFI to Mackenzie. That by itself is enough to establish the transfers were made with actual fraudulent intent. See Agretech, 916 F.2d at 535.

We find Mackenzie's cross-appeal without merit, and we continue to the issue in the Trustee's appeal: the application of the good faith exception under CAL. CIV. CODE § 3439.08(a), which is the equivalent to 11 U.S.C. § 548(c).

E. The Good Faith Exception Under CAL. CIV. CODE § 3439.08(a) is Not Barred as a Matter of Law.

We have twice addressed the application of the phrase "reasonably equivalent value" related to fraudulent transfer law in the context of a Ponzi scheme.⁵ The first time was in Agretech, where we held that a distribution on account of a partnership interest relative to an investor's capital contribution was not "reasonably equivalent value" as defined by the Bankruptcy Code and Hawaii's analog. Agretech, 916 F.2d at 540. The second was in United Energy, where we held that a transfer in...