In re Independent Clearing House Co.
| Decision Date | 06 August 1984 |
| Docket Number | 81A-02887 and 81A-03704,Bankruptcy No. 81A-02886,Adv. No. 83PA-0986. |
| Citation | 41 BR 985 |
| 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, v. David ABBOTT, et al., Defendants. |
| Court | U.S. Bankruptcy Court — District of Utah |
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William G. Fowler and Michael N. Zundel, Roe, Fowler & Moxley, Salt Lake City, Utah, for trustee.
Daniel W. Jackson and Jeffrey W. Wilkinson, Bradley, Arrowsmith & Jackson, Salt Lake City, Utah, for 322 defendants.
Gary A. Frank, Murray, Utah, for 238 defendants.
Richard H. Casper, Ray, Quinney & Nebeker, Salt Lake City, Utah, for Briant H. Summerhays.
Jeffrey C. Zimmerman, Fabian & Clendenin, Salt Lake City, Utah, for Sur. Nat. Bank.
Edwin F. Guyon, Guyon & Guyon, Salt Lake City, Utah, for David Ashby.
Kathleen M. Nelson, Bountiful, Utah, for Fern Moser and Ron Schooley.
William B. Parsons III, Pace, Klimt, Wunderli & Parsons, Salt Lake City, Utah, for American Factoring and Edward and Mark Lemmon.
Don L. Bybee, Salt Lake City, Utah, for Fred and Elaine Kennedy.
Richard F. Bojanowski, Salt Lake City, Utah, for David L. Barfuss Family Trust, Carl and Susan Benson and Marian L. Benson.
Joseph C. Fratto, Jr., Salt Lake City, Utah, for Harry B. Young and Johnson & Brown.
George H. Mortimer, Provo, Utah, for C. Dean Packer.
Dale F. Gardiner, Salt Lake City, Utah, for David and Nancy Herbert, and Antje and Hilkina Thompson.
Claude C. Richards, Provo, Utah, for Joseph E. Wood.
Clinton Williams, pro se.
An unusual situation is presented in this proceeding. These are two thousand adversary complaints filed by the trustee against investors in a "Ponzi" scheme to recover alleged preferences and fraudulent conveyances.1 The proceedings were consolidated for trial by order of this Court. Defendants contend that the funds sought to be recovered by the trustee were impressed with a constructive trust in their favor and never became property of the debtors' estate, and thus are not recoverable by the trustee.
Independent Clearing House Company and Universal Clearing House Company filed petitions for relief under Chapter 11 of the Bankruptcy Code on September 16, 1981. Accounting Services Company filed a Chapter 11 petition on December 17, 1981. On April 29, 1982, an order for relief was granted against Tonder Payable Service Company, and on August 16, 1982, against Payable Accounting Company. Each of the five related debtor entities was created as a "Massachusetts" or business trust, domiciled in the Grand Cayman Islands, British West Indies.2
On September 25, 1981, the Court appointed Dr. Ron N. Bagley, a certified public accountant and professor in the Business Department of the University of Utah, trustee pursuant to 11 U.S.C. ? 1104. On October 1, 1981, the Court authorized Dr. Bagley to serve as his own accountant on the case. On October 26, 1982, Bagley resigned as trustee and Robert D. Merrill was appointed successor trustee.
Immediately following the filing of the bankruptcy petitions, the F.B.I., pursuant to a search warrant, seized many of the debtors' business records.3 On May 11, 1983, a Federal Grand Jury for the District of Utah returned a sealed indictment charging 21 persons connected with the operation of the Clearing Houses with various crimes, including wire fraud, mail fraud, interstate transportation of money obtained by fraud, bankruptcy crimes, and racketeering.4 The indictment alleges that the principals of the debtors engaged in a massive "Ponzi" scheme in which funds deposited by later investors were utilized to pay "interest" to previous investors.5 Trials in the criminal cases are presently pending.
In late June of 1980, the debtors ran into trouble. The securities commissions in several states had issued orders enjoining them from soliciting investments.6 No business was being conducted by the debtors at the time of filing their bankruptcy petitions, and none has been conducted by the trustee. Rather, the trustee has determined that the primary assets of the debtors' estate consist of various legal claims against individuals and entities to whom funds of the debtors were allegedly diverted.7
On May 10, 1984, the Court entered its order confirming the trustee's plan of reorganization. The plan provides for the substantive consolidation of the debtors, liquidation of all their assets, and a distribution on a periodic basis to all claimants in accordance with the priorities under the Bankruptcy Code.8
On September 15, 1983, within two years after the appointment of a trustee, these proceedings were commenced to recover funds paid by the debtors to their investors.9
The complaint sets forth three principal causes of action.10 The first cause of action alleges that the debtors' payments to investors within 90 days of the filing of their bankruptcy petitions constitute preferential transfers. The second cause of action alleges that certain defendants received more than they deposited with the debtors and this "profit" constitutes a fraudulent conveyance. The trustee's third cause of action alleges that all payments made to investors constitute fraudulent conveyances and may be recovered for a pro-rata distribution. The trustee also seeks an allowance of prejudgment interest at the legal rate from the date of the transfers.
On February 24, 1984, the trustee filed a motion for summary judgment supported by the affidavit of his accountant, Dr. Ron N. Bagley, and a memorandum of points and authorities. The trustee further moved the Court, in conjunction with his motion for summary judgment, for leave to amend his complaint to conform to the proof offered in the affidavit of his accountant.11 Thereafter, various defendants filed responses and cross-motions for summary judgment. Oral argument was presented on March 29, 1984, and the matter was taken under advisement.
While many details are missing and may never be known, the critical facts, as they appear from the pleadings, answers to interrogatories, together with the affidavit of the trustee's accountant, are clear and uncontroverted. The uncontroverted facts as set forth in the affidavit of the trustee's accountant may be stated as follows:
(1) Independent Clearing House Company and Universal Clearing House Company filed petitions for relief under Chapter 11 of the Bankruptcy Code on September 16, 1981.
(2) The stated business purpose of the debtors was to solicit funds from private investors, who were characterized as "undertakers," and to use the invested funds for the purpose of assuming and paying the accounts payable of various client companies. Profits were to be obtained, which represented the difference between discounts negotiated with the creditors of the client companies and the sums repaid by the client companies.
(3) Commencing in 1980, the debtors began soliciting investments from private investors through sales agents.
(4) The investor contracts provided in part that:
(5) Investors also signed a document styled "Commitment to Assume Debt," which sets forth the details of how their funds are to be committed to the debtors.
(6) In 1980 and 1981, thousands of investors deposited sums totaling more than 29 million dollars with the Clearing Houses.
(7) Until the investment program collapsed in July-September, 1981, investors received contractual returns of $84.00 per month per $1,000.00 invested.
(8) No client companies existed whose accounts payable were paid by the debtors in accordance with the program as represented to investors, and no profits or earnings were ever produced by the purported accounts payable program.
(9) The only source of funds for the debtors were investments of "undertakers."
(10) All of the monthly payments made to investors were paid from other "undertaker" investments.
(11) The debtors were insolvent from the moment of the execution of the first investor contract, and became more insolvent with each successive contract.
(12) The business of the debtors was conducted as a "Ponzi" scheme in which fictitious profits were paid to investors from the principal sums deposited by subsequent investors.12
(13) The defendants in these adversary proceedings are investors of Independent Clearing House and/or Universal Clearing House.
(14) Those who invested with Independent Clearing House and/or Universal Clearing House consist of three general groups:
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...Danning v. Bozek (In re Bullion Reserve of N. Am.), 836 F.2d 1214, 1219 n. 8 (9th Cir.1988); see Merrill v. Abbott (In re Indep. Clearing House Co.), 41 B.R. 985, 994 n. 12 (Bankr.D.Utah 1984) (defining a Ponzi scheme and describing its history), aff'd in part, rev'd in part sub nom. Merril......