In re Bonham

• Citation: 226 BR 56
• Decision Date: 10 April 1998
• Docket Number: Bankruptcy No. F95-00897-HAR.
• Parties: In re RaeJean BONHAM, aka Jean Bonham, aka Jeannie Bonham, dba World Plus, Debtor.
• Court: United States Bankruptcy Courts. Ninth Circuit. U.S. Bankruptcy Court — District of Alaska

226 B.R. 56 (1998)

In re RaeJean BONHAM, aka Jean Bonham, aka Jeannie Bonham, dba World Plus, Debtor.

Bankruptcy No. F95-00897-HAR.

United States Bankruptcy Court, D. Alaska.

April 10, 1998.

COPYRIGHT MATERIAL OMITTED

RaeJean Bonham, Fairbanks, AK, Debtor, Pro se.

Cabot Christianson, Gary Spraker, Bundy & Christianson, Anchorage, AK, James DeWitt, for trustee.

Larry D. Compton, Anchorage, AK, trustee.

John Burns, David G. Parry, Birch, Horton, Bittner & Cherot, Fairbanks, AK, Rebecca Copeland, Koval & Featherly, Anchorage, AK, for Joint Defense Committee.

Brad E. Ambarian, Lane, Powell, Spears, Lubersky, Anchorage, AK, Grant E. Courtney, Lane, Powell, Spears, Lubersky, Seattle, WA, Ronald Goss, Shulkin Hutton, Inc., Seattle, WA, for Various Defendants.

Gerald K. Smith, Randolph J. Haines, Lewis & Roca, Phoenix, AZ, for Defendants.

Kenneth Wooten, Fairbanks, AK, Creditor, Pro se.

MEMORANDUM DECISION FOR ALLOWANCE OF SUBSTANTIVE CONSOLIDATION

HERBERT A. ROSS, Bankruptcy Judge.

                                               Table of Contents                                     Page
                1. INTRODUCTION ......................................................................  59
                2. FACTS .............................................................................  60
                   2.1.  Procedural Background .......................................................  60
                   2.2.  Background Of World Plus and World Plus, Inc. ...............................  61
                   2.3.  Background of Atlantic Pacific Funding Corp. ................................  61
                   2.4.  Business of Selling Airline Tickets Procured With Frequent Flyer Miles ......  63
                   2.5.  Delta Air Lines Suit ........................................................  66
                   2.6.  Investment Contract Business (The Ponzi Scheme) .............................  66
                   2.7.  Relationships Between World Plus, Inc. and Atlantic Pacific FundingCorp. .....................................................................  66
                   2.8.  Bank Accounts ...............................................................  67
                   2.9.  The State of Alaska Securities Investigation ................................  69
                   2.10. The State of Idaho Securities Investigation .................................  71
                   2.11. Transfers For Personal Benefit ..............................................  72
                   2.12. Benefits vs. Burdens of Consolidation; Reliance of the Investors onWPI or APFC ...............................................................  73
                3. ISSUES ............................................................................  75
                4. LEGAL ANALYSIS ....................................................................  75
                   4.1.  A Bankruptcy Court Has Authority to Order Substantive Consolidationof Entities (Usually All of Them Debtors) in an Appropriate Case ..........  75
                   4.2.  Substantive Consolidation Should be Distinguished from State Law AlterEgo Remedies ..............................................................  76
                   4.3.  Early Development of the Case Law of Substantive Consolidation ..............  77
                             Fish v. East ............................................................  78
                             Sampsell v. Imperial Paper & Color Corp .................................  78
                             Stone v. Eacho ..........................................................  79
                             Soviero v. Franklin National Bank .......................................  79
                             Chemical Bank New York Trust Co. v. Kheel ...............................  79
                             Flora Mir Candy Corp. v. R.S. Dickson & Co. .............................  80
                             In re Gulfco Investment Corporation .....................................  80
                   4.4.   Substantive Consolidation Cases Under The Bankruptcy Code ...................  81
                             In re Vecco Construction Industries, Inc. ...............................  81
                             In re Snider Bros., Inc. ................................................  81
                             Augie/Restivo Baking Co., Ltd. ..........................................  82
                             Eastgroup Properties v Southern Motel Assoc., Ltd. ......................  82
                   4.5.   Substantive Consolidation of Non-Debtors Under the Bankruptcy Code ..........  83
                             In re 1438 Meridian Place, N.W., Inc. ...................................  84
                             In re Crabtree ..........................................................  85
                

                             In re Tureaud ...........................................................  85
                             Matter of Baker & Getty Financial Services, Inc. ........................  85
                             In re Munford, Inc. .....................................................  86
                             In re United Stairs Corp. ...............................................  87
                             Matter of New Center Hospital ...........................................  88
                             In re Creditors Services Corp. ..........................................  89
                             In re Alpha & Omega Realty, Inc. ........................................  90
                             In re R.H.N. Realty Corp. ...............................................  91
                             In re Julien Co. ........................................................  91
                             In re Lease-A-Fleet, Inc. ...............................................  92
                  4.6.   Motion is Appropriate to Determine the Substantive Consolidation Issue ......  93
                  4.7.   Application of Law to Determine If WPI and APFC Should be SubstantivelyConsolidated With the RaeJean Bonham Case .................................  95
                  4.8.   Should the Consolidation be Nunc Pro Tunc to Original Filing Date? ..........  98
                             In re Auto-Train Corp. ..................................................  98
                             Baker & Getty Financial Services, Inc. .................................. 100
                             Matter of Evans Temple Church- .......................................... 100
                            In re Kroh Brothers Development Co. ...................................... 101
                5. CONCLUSION ........................................................................ 102
                

1. INTRODUCTION — Larry Compton, the chapter 7 trustee, filed a motion to consolidate the estate of the individual debtor, RaeJean Bonham, with the estates of two non-debtors, World Plus, Inc. (WPI) and Atlantic Pacific Funding Corp. (APFC), two corporations closely held by Bonham.

The trustee asks that consolidation be effective as of December 19, 1995, the date that the involuntary bankruptcy proceeding was commenced against Ms. Bonham. The trustee seeks to fix that date for avoidance proceedings with respect to any transfers made by Bonham, WPI, and APFC.

There are no assets in these estates of significant value, except the avoidance recoveries. Ms. Bonham operated a Ponzi scheme through investment contracts issued in the name of WPI and APFC in the four or five years before December 19, 1995. If consolidation is not permitted, the creditors of Bonham, WPI and APFC, totaling over $50 million dollars in claims filed in this bankruptcy (the largest percentage coming from losses related to the investment contracts) will recover nothing.

There has been vigorous opposition to consolidation from the targets of the avoidance actions filed by the trustee. Appendix A is a table setting out the voluminous pleadings on this issue.

The trustee has filed over 600 adversary proceedings seeking avoidance of payments by WPI and APFC to investment contract participants. If the consolidation is denied, most or all of these avoidance actions will fail and the creditors will receive nothing.

Whether or not to allow substantive consolidation is generally a fact-driven decision. For that reason, the facts the court relies on are extensively set forth in Part 2 of this Memorandum Decision. The case law uniformly holds that substantive consolidation should be sparingly used, with an eye to possible negative effects on creditors. Yet, there are cases where substantive consolidation is justly applied.

The bar is set even higher with respect to the substantive consolidation of non-debtors. Nonetheless, this is an appropriate case to invoke the doctrine. In balancing the interests of the parties, I find that they favor granting the substantive consolidation of the WPI and APFC estates with the estate of RaeJean Bonham.

The procedure to raise the issue has been fair. The effective date of the substantive consolidation of this case with the estates of WPI and APFC shall be December 19, 1995.

2. FACTS¹ —

2.1. Procedural Background—

2.1.1. On December 19, 1995, an involuntary chapter 7 petition was filed by various creditors against RaeJean Bonham, aka Jean Bonham, aka Jeannie Bonham, dba World Plus.

2.1.2. On December 20, 1995, a hearing was held on the motion of the petitioning creditors to appoint an interim trustee. Larry Compton was appointed the interim trustee during this involuntary chapter 7 proceeding. See, Order, Docket Entry 5.

2.1.3. The debtor, RaeJean Bonham, initially contested the involuntary chapter 7. However, at a hearing on January 8, 1996, she agreed to the petition and the appointment of a chapter 11 trustee, and converted the case to chapter 11. On January 9, 1996, the court entered an Order For Relief And Voluntarily Conversion To A Chapter 11 Case (Docket Entry 38, filed January 9, 1996).

2.1.4. RaeJean Bonham filed a voluntary chapter 11 petition on January 5, 1996, Case No. F96-00013-HAR, listing as debtors herself, APFC, and WPI. The petition states in Bonham's handwriting: "This is an individual filing — these are names of corporations in which debtor was a former shareholder. RSB." No activity had taken place in that case, and no schedules, statements or lists had been filed. At the hearing on January 8, 1996, the court indicated that it would dismiss the voluntary case, F96-00013-HAR, and an Order Dismissing Voluntary Petition was entered ...