In re Mark Benskin & Co., Inc.
| Decision Date | 23 December 1991 |
| Docket Number | Bankruptcy No. 89-22793-B,Adv. No. 89-0288. |
| Citation | 135 BR 825 |
| Parties | In re MARK BENSKIN & CO., INC., Debtor. George W. EMERSON, Trustee, Plaintiff, v. James O. MARTY, Defendant/Cross-Defendant, and The Estate of Ausencio L. Campos, Steven Campos, Executor, Defendant/Intervenor/Cross-Plaintiff. |
| Court | U.S. Bankruptcy Court — Western District of Tennessee |
James O. Marty and Jill Graves Clyburn, Memphis, Tenn., for James O. Marty.
George W. Emerson, Jr., Memphis, Tenn., trustee.
Michael G. McLaren, Elizabeth T. Collins, Thomason, Hendrix, Harvey, Johnson, Mitchell, Blanchard & Adams, Memphis, Tenn., for trustee.
David M. Sullivan, Memphis, Tenn., for Campos Estate.
In this adversary proceeding, the Trustee sued James O. Marty ("Marty") for avoidance of two transfers as either preferences or fraudulent conveyances under 11 U.S.C. §§ 547 or 548. The Estate of Ausencio L. Campos, through Steven Campos, Executor ("Campos"), after an order approving intervention, filed an answer and cross claim against Marty. Campos basically took the position that the funds paid to Marty could be traced to an investment made by Campos with the debtor Mark Benskin & Co., Inc., that the debtor held the Campos investment in trust, and that payment to Marty out of the Campos funds was fraudulent. Campos sought recovery of $6,300.00 from Marty.
This adversary proceeding was tried on July 29, 1991. The parties have now submitted post-trial briefs. The following contains findings of fact and conclusions of law pursuant to F.R.B.P. 7052.
This proceeding was originally brought by the Trustee under 11 U.S.C. § 547 and § 548. Section 547(b) provides:
Section 548(a) was pled by the Trustee but was not relied upon in this trial.
Mr. Marty relied upon a defense that the subject transfers to him were withdrawals of his own property and were not property of the debtor's estate. No § 547(c) defenses were alleged nor proven. The Campos cross-plaintiff relied upon tracing concepts which will be more fully discussed. However, the Court will first address whether the transfers to Marty are avoidable by the Trustee.
1. The Trustee called Mark Benskin ("Benskin"), the principal of the debtor Mark Benskin & Co., Inc., and himself an involuntary debtor in this Court in case number 89-23263-B. In fact, Benskin operated this debtor as a sole proprietorship rather than as a corporation. Mr. Benskin has previously entered guilty pleas in a fifty count indictment in the United States District Court in this District, Criminal Number 89-20166-G (Ex. 16), and he is presently serving a sentence in a federal institution at Millington, Tennessee.
2. In 1989, Benskin was acting as an unlicensed investment adviser. Investors, such as Marty and Ausencio Campos, would open investment accounts with Benskin and/or his company. Checks were normally payable to Mark Benskin & Co., Inc. and were deposited and commingled in a client escrow fund account. From that account, Benskin withdrew or transferred funds for all operating expenses and for Benskin's personal expenses. The debtor did not maintain separate depository accounts for each of its clients; although, it maintained separate files for each client.
3. Mr. Marty was a client of the debtor and beginning in 1988 the debtor accepted certain funds from Marty. There were no specific instructions or restrictions as to the investments to be made, and Marty's money went into the general escrow account.
4. The debtor issued to its clients, including Marty and Campos, statements confirming the client deposit. (Ex. 12) However, no separate account actually was created and the confirmation statements were fictitious.
5. On July 21, 1988, Marty transferred by check payable to Mark Benskin & Company, Inc., $5,000.00, with the notation on the check "Escrow." (Ex. 3) This check was deposited into this debtor's commingled escrow account.
6. On November 4, 1988, Marty transferred by check payable to Mark Benskin, $6,000.00, with the notation on the check "Investment." (Ex. 5) This check was deposited into this debtor's commingled escrow account.
7. No security was given nor intended in exchange for the Marty "investments."
8. When Marty paid his money, he and Benskin talked generally about investments, and Marty did not authorize Benskin to utilize Marty's investment funds for operating or personal expenses. Mr. Marty was given and signed a four page "Customer Agreement," which agreement was routinely signed by most of the debtor's clients. (Ex. 4) Mr. Benskin did not sign the Marty "Customer Agreement." Mr. Benskin testified that at the time Marty made his investments, he (Benskin) intended to place Marty's money in escrow and invest it.
9. On July 22, 1988, the debtor deposited $20,784.06 into its commingled escrow account at National Bank of Commerce ("NBC"), which deposit consisted of seven items including the Marty $5,000.00 check. (Ex. 6) This deposit was representative of the manner in which the debtor commingled deposited funds.
10. Each month the debtor issued a statement to clients such as Marty and Campos. (Exs. 2, 13) However, these statements were often fictitious and did not accurately reflect the condition of the client's "investment."
11. In February, 1989, Marty made demand for a withdrawal of $6,300.00 and a check was written to Marty, drawn on the debtor's NBC escrow account on February 10, 1989, in that amount. (Ex. 1) At that point, Marty had deposited $11,000.00 but his money was probably not invested, according to Benskin's testimony. Clearly, it was not invested distinctly for Marty. Marty's statement dated February 10, 1989, reflected a fictitious balance of $13,091.26 from which the $6,300.00 was paid. (Ex. 2) In February, 1989, there was a general run being made on the debtor by clients and the debtor was using commingled clients' funds to pay those other clients who made demand.
12. The debtor was operating a Ponzi scheme under which he took clients' funds and used them to pay other clients. Payments to some clients exceeded the "investments" made by those clients.
13. Mr. Benskin could not testify exactly what happened to Marty's money since he did not maintain separate accounts for each client and since the common escrow account was used for business and personal purposes.
14. Some investors placed notations on their investment checks, such as "CM Account" or "For Dep. in Am Capital" or "Stock Investments." (Ex. 7) Nevertheless, their checks were commingled in one escrow account. (Ex. 7) Mr. Benskin testified that the memo line on a client's check was irrelevant to what he did with the check. The debtor did in fact invest some of the client's funds, for example in American Capital Trust Co. ("American Capital"). (See Ex. 8) The debtor was not an authorized agent for American Capital; although, the debtor did receive funds and sales material from American Capital.
15. The debtor on February 29, 1988, acknowledged receipt of a deposit from Ausencio L. Campos in the amount of $88,000.00, which letter and attached documents referred to an investment in American Capital government securities. (Ex. 9) The debtor in fact did not invest the $88,000.00 in American Capital and those funds were not restricted.
16. The debtor, in January, 1989, obtained an additional $50,000.00 from Campos under false representations that those funds would be delivered to American Capital. (Ex. 11) Mr. Campos expressed a desire for a conservative investment approach; however, the $50,000.00 were neither specifically restricted nor invested.
17. As to Campos, fictitious account statements were generated. (Exs. 12 & 13)
18. The debtor did not have Campos' permission to use Campos' funds for operating expenses or for any purpose other than investment.
19. The Campos $50,000.00 funds were deposited in the NBC escrow account on January 25, 1989. (Exs. 11 & 14) The Campos funds were used like all other commingled funds.
20. The checks posted by NBC to the escrow account between January 25 and February 13, 1989 were introduced as Exhibit 15.
21. The debtor made no distinction between new and old client funds, which all were deposited in the same escrow account.
22. The Court conducted a bifurcated insolvency trial, as to the pending non-jury adversary proceedings, on January 7, 1991, after notice to all necessary parties, at which time the uncontroverted proof offered by the Trustee established that both debtors were insolvent for the entire one year preceding the bankruptcy filing.
23. By the time of Benskin's arrest in April, 1989, all of the Marty and Campos funds had been depleted. In fact, only a nominal amount remained in the debtor's escrow account.
24. Mr. Marty testified that he intended his two checks to be used for investment only, and he understood that he could obtain a return of his "investment" upon demand.
25. James L. Lindsey, Vice President and Manager of NBC's auditing department, testified that Exhibit 14 represented the posting...
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