In re Independent Clearing House Co.
| Decision Date | 23 July 1987 |
| Docket Number | C-84-0928J and consolidated cases.,No. C-84-0927W,C-84-0927W |
| Citation | 77 BR 843 |
| Parties | In re INDEPENDENT CLEARING HOUSE COMPANY, a Trust, Debtor. In re UNIVERSAL CLEARING HOUSE COMPANY, a Trust, aka National Clearing House Company, a Trust, Debtor. In re ACCOUNTING SERVICES COMPANY, a Trust, Debtor. Robert D. MERRILL, Trustee, Plaintiff-Appellee and Cross-Appellant, v. David ABBOTT, et al., Defendants-Appellants and Cross-Appellees. |
| Court | U.S. District Court — District of Utah |
COPYRIGHT MATERIAL OMITTED
COPYRIGHT MATERIAL OMITTED
COPYRIGHT MATERIAL OMITTED
William G. Fowler and Joel Dangerfield, Robert D. Merrill, Salt Lake City, Utah, for plaintiff.
Gary R. Appel, Rothgerber, Appel, Powers & Johnson, Denver, Colo., Laura Harris, Daniel Jackson and Jeffrey Wilkinson, Edward F. Guyon, Salt Lake City, Utah, for defendants.
Before JENKINS, Chief Judge, and WINDER and J. THOMAS GREENE, District Judges, sitting en banc.
On September 30, 1985, this court, sitting en banc, heard cross-appeals from the decision and judgments of the United States Bankruptcy Court for the District of Utah in numerous adversary proceedings brought by the trustee in bankruptcy of the debtor entities against named defendants.1 The appeals had been consolidated for purposes of briefing and oral argument. At oral argument William G. Fowler and Joel R. Dangerfield appeared on behalf of the bankruptcy trustee, plaintiff-appellee and cross-appellant Robert D. Merrill, who also appeared in his own behalf. Daniel W. Jackson and Jeffrey W. Wilkinson appeared on behalf of over 350 defendants-appellants; Edwin F. Guyon appeared on behalf of some 80 other defendants-appellants; Laura M. Harris and Garry R. Appel appeared on behalf of defendant-appellant Ruby Van Sant; and defendants-appellants Thomas D. Richards and Charles A. Schultz appeared pro se. After oral argument the court took all the matters under advisement. After reviewing the records of these appeals, the arguments of counsel and the pertinent authorities, the court now enters this memorandum opinion. Each appeal has been considered on its own merits. Most of the questions decided are common to all.
These consolidated adversary proceedings arose out of the collapse of an alleged Ponzi scheme.2 The debtors are Independent Clearing House Company (ICH) and Universal Clearing House Company (UCH) (the clearinghouses) and Accounting Services Company (ASC). Each of the debtor entities is a "Massachusetts" or commonlaw trust,3 domiciled in the Grand Cayman Islands, British West Indies. ASC's stated business was to provide management consulting services and accounting and payable services to client companies. ICH and UCH were to provide clearinghouse services for ASC, its clients and associated entities. Bagley affidavit ex. A. The stated business purpose of the trusts was to solicit funds from private investors, called "undertakers," and to use the funds received to assume and pay at a discount the accounts payable of ASC's clients. The trusts were to make a profit by receiving repayment from the client companies in excess of the discounted sums paid.
The "undertakers" signed contracts by which they committed to one of the clearinghouses a specified sum of cash, credit or other commodities for a period of nine months. The funds committed to the clearinghouse were to remain under the clearinghouse's custody and control until the end of the nine months, at which time the principal amount was to be repaid to the undertaker. Under the terms of the contracts, undertakers assumed the debts of ASC's clients, and ASC assigned to the undertakers the right to receive payment from its clients. Thus, in addition to the return of his principal, an undertaker was also to receive additional sums purportedly representing "revenues" from the client companies. An undertaker could elect to receive revenues or "earnings" in fixed monthly payments over the nine months or in a lump sum at the end of the nine-month period. If an undertaker chose to be paid monthly, he was to be paid at a rate of .0015 times his investment per business day for twenty business days each month. If he chose to be paid at the end of the nine months, he was to be paid at a rate of .004 times his investment per business day, which worked out to $84 per month per $1,000 invested. See 41 B.R. at 994 (); Bagley affidavit ?? 9-12 & ex. A. The clearinghouses were to retain full control of the right to revenues assigned to undertakers. Bagley affidavit ex. A.
The bankruptcy trustee has alleged, without contradiction, that ASC had no clients. Bagley affidavit ? 15. Apparently, the money supplied by undertakers went into a common fund, from which "earnings" were paid and principal repaid. Later undertakers supplied the money to pay "earnings" and repay principal of earlier undertakers. Id. ?? 16-20.4
On September 16, 1981, ICH and UCH filed petitions for relief under chapter 11 of the bankruptcy code.5 ASC filed a chapter 11 petition on December 17, 1981.6 On September 25, 1981, the bankruptcy court appointed Dr. Ron N. Bagley as bankruptcy trustee pursuant to section 1104 of the Code. On October 26, 1982, Dr. Bagley resigned as trustee, and the court appointed Robert D. Merrill to take his place. On September 15, 1983, within the limitations period of section 546(a), Mr. Merrill, as trustee, brought some two thousand adversary proceedings to recover funds that the debtors had paid to undertakers as "earnings" or as repayment of funds the undertakers supplied the trusts.
The defendants in these actions were all undertakers who received some payments from the debtor trusts within one year of the debtors' filing their bankruptcy petitions, either as "earnings" or repayment of principal or both. The defendants for the most part fall into two categories: (1) those who advanced money early and received "earnings" and repayment of principal in excess of their initial advance, and (2) those who advanced money and received some payments of "earnings" or repayments of principal or both but no more than their initial advance.7
The trustee's complaint set out four claims for relief. The first claim sought to avoid as preferences under section 547 of the Code transfers of money that the debtors had made to a defendant within ninety days prior to the filing of the debtors' bankruptcy petitions. The second claim sought to avoid as fraudulent conveyances under sections 548 and 544 transfers of money that the debtors had made to a defendant in excess of his advance and within one year before filing their petitions. The third claim sought to avoid on the same grounds all transfers of money that the debtors had made to a defendant within one year of filing their petitions.8 The fourth claim sought to disallow claims that a defendant had filed against the estate unless the defendant remitted to the estate the allegedly preferential and fraudulent transfers he had previously received.
On March 30, 1984, the bankruptcy court entered default judgments against some of the defendants. It later denied the defendants' motions to set aside those judgments.9 On August 6, 1984, the bankruptcy court entered a memorandum opinion disposing of the remaining cases. Merrill v. Abbott (In re Independent Clearing House Company), 41 B.R. 985 (Bankr.D. Utah 1984). The bankruptcy court granted the trustee's motion for summary judgment on his first and second claims for relief. It also granted summary judgment to each of the non-defaulting defendants on the trustee's third claim for relief and dismissed those claims with prejudice. The court also awarded the trustee prejudgment interest on his successful claims, from September 15, 1983, the date he filed his complaint.
The trustee appealed from the bankruptcy court's dismissal of his third claim for relief, and many of the defendants appealed from the court's grant of summary judgment to the trustee on his first and second claims for relief.
On June 5, 1985, this court ordered all pending appeals from these proceedings?€” including the appeals from the bankruptcy court's entry of summary judgment and the appeals from the orders denying motions to set aside default judgments?€”consolidated for purposes of briefing and oral argument.
Some of the defendants argue that the bankruptcy court lacks subject matter jurisdiction in this case because the debtor entities cannot qualify as "debtors" under the bankruptcy code. A motion to dismiss for lack of subject matter jurisdiction can be made at any time in a proceeding, including for the first time on appeal. Generally, an appellate court will not reverse a lower court's findings of jurisdictional facts unless "clearly erroneous." See Eaton v. Dorchester Development, Inc., 692 F.2d 727, 732 (11th Cir.1982); Williamson v. Tucker, 645 F.2d 404, 413 (5th Cir.), cert. denied, 454 U.S. 897, 102 S.Ct. 396, 70 L.Ed.2d 212 (1981). See also Bankruptcy Rule 8013.
Some defendants argue that the debtors in this case do not qualify for relief under title 11. Section 301 of the Code provides that only an entity that can qualify as a "debtor" under a chapter of title 11 can file a voluntary case under that chapter. The Code further provides that only "persons" can be debtors under chapter 11. See 11 U.S.C. ? 109(a), (b) & (d). It defines a "person" to include an "individual, partnership, and corporation," id. ? 101(30), and further defines a "corporation" to include a "business trust," id. ? 101(8)(A)(v). The defendants argue that the debtor enterprises (Massachusetts trusts) are not "business trusts" and are therefore not eligible for relief under the Code. If the debtors are not eligible for relief under the Code, then the statutory source of the bankruptcy court's exercise of jurisdiction in these adversary proceedings is lacking, and they must be dismissed.
This court has...
To continue reading
Request your trial
-
Schneider v. R. Kenneth Barnard, of Janitorial Close-Out City Corp.
...from the very nature of his activities, that investors at the end of the line will lose their money.” Merrill v. Abbott (In re Indep. Clearing House Co.), 77 B.R. 843, 860 (D.Utah 1987). Accordingly, when a Ponzi entity transfers funds out of the Ponzi scheme, “only one inference is possibl......
- In re Hardzog, Bankruptcy No. BK-86-3552-A.