In re Mark Benskin & Co., Inc.

• Decision Date: 07 December 1993
• Docket Number: Bankruptcy No. 89-22793-B. Adv. No. 91-0157.
• Citation: 161 BR 644
• Court: U.S. Bankruptcy Court — Western District of Tennessee
• Parties: In re MARK BENSKIN & CO., INC., Debtor. George EMERSON, Trustee, Plaintiff, v. Ray MAPLES and Brenda Maples, Defendant/Cross Defendants, and Beverly Poston, Defendant/Intervenor/Cross Plaintiff.

161 B.R. 644 (1993)

In re MARK BENSKIN & CO., INC., Debtor George EMERSON, Trustee, Plaintiff, v. Ray MAPLES and Brenda Maples, Defendant/Cross Defendants and Beverly Poston, Defendant/Intervenor/Cross Plaintiff.

Bankruptcy No. 89-22793-B. Adv. No. 91-0157.

United States Bankruptcy Court, W.D. Tennessee, W.D.

December 7, 1993.

COPYRIGHT MATERIAL OMITTED

Elizabeth Collins and Michael McLaren, Memphis, TN, for Trustee.

David Sullivan, Memphis, TN, for Beverly Poston.

W. Clark Washington, Memphis, TN, for Ray and Brenda Maples.

AMENDED MEMORANDUM OPINION

WILLIAM H. BROWN, Bankruptcy Judge.

In this adversary proceeding, the Trustee filed a complaint, now amended, against Ray and Brenda Maples, seeking to avoid certain transfers from the debtor to the Maples as fraudulent conveyances under 11 U.S.C. § 548. The issues raised in that complaint are core under 28 U.S.C. § 157(b)(2)(H). Beverly Poston¹ was allowed to intervene in this adversary proceeding, and she filed a cross claim against the Maples, in which Beverly Poston asserted trust, fraud and conversion theories in an effort to obtain a judgment against the Maples for $33,100.00 plus accrued interest from December 8, 1988, and punitive damages. The Poston claims involve determinations of transfer avoidance, property of the estate and allowance of claims against the estate and are core pursuant to 28 U.S.C. § 157(b)(2)(A), (B) and (H). The parties consented to a trial without a jury, and the Court will enter a final order on all issues, subject to appeal pursuant to 28 U.S.C. § 158.² This opinion contains findings of fact and conclusions of law pursuant to F.R.B.P. 7052. The Court issued its original opinion on November 12, 1993, as an accommodation to counsel who had a trial in November in another similar adversary proceeding, and the Court reserved the opportunity to make revisions in that opinion. A final order and judgment will be entered at this time.

HISTORY OF THE CASE

As a background to this adversary proceeding, two involuntary bankruptcy petitions were filed against the debtor and against a related debtor, Mark Stephen Benskin, on April 14, 1989. Orders for relief were subsequently entered pursuant to 11 U.S.C. § 303(h), and the Trustee filed numerous avoidance proceedings. It has been established clearly in the proof that Mr. Benskin conducted his business as a sole proprietorship ignoring corporate formalities. Generic references to the debtor in this opinion may refer to either debtor. Both debtors were substantially engaged in an illegal Ponzi scheme, through which the debtors obtained funds from some clients, such as Beverly Poston, under the false pretense of making investments for them. The debtor engaged in some legitimate business activity, for example, when it handled restricted accounts such as IRAs. However, illusory profits were often paid to some clients, such as the Maples, out of the funds paid in by new clients, such as Beverly Poston, and that is frequently the case in such schemes. See, e.g., Rosenberg v. Collins, 624 F.2d 659, 663-64 (5th Cir.1980); Emerson v. Marty, et al. (In re Mark Benskin & Co., Inc.), 135 B.R. 825 (Bankr.W.D.Tenn.1991); compare, Duvoisin v. Evans (In re Southern Industrial Banking Corp.), 159 B.R. 224 (Bankr. E.D.Tenn.1993) (where Judge Kelley distinguished legitimate business activity from an overall Ponzi scheme). Mr. Benskin and the debtor corporation pled guilty to a multicount federal indictment. U.S. v. Benskin, 926 F.2d 562 (6th Cir.1991). In an earlier opinion in this case, the Court denied the Trustee's action seeking a preferential transfer avoidance and recovery against different parties due to a failure of proof and allowed a tracing by another intervenor so as to give that intervenor a recovery against that defendant. Emerson v. Marty, 135 B.R. at 832. However, the Court

observed that this result may be unique to this proceeding. Had the Trustee carried the burden of proving all elements of § 547(b), the Marty transfer would have been an avoidable preference and, as such, it would have been property of the estate. Then, a different tracing methodology may have been employed. See, e.g., First Federal of Michigan v. Barrow, 878 F.2d 912, 916 (6th Cir.1989). Further, the intervenor would have been competing as an unsecured creditor for a pro-rata share of the bankruptcy estate. Therefore, this opinion should not be used as a per se ruling that all intervenors necessarily would prevail against the bankruptcy Trustee.

Id. at 834.

The instant adversary proceeding presents the Court with a distinct confrontation between the federal bankruptcy doctrine of equality of distribution for the benefit of all unsecured creditors and state law equitable or legal principles, including specific creditor avoidance powers, that favor an innocent third party who lost money due to a debtor's fraud or deception. As predicted in the Court's prior Marty decision in this case, intervenors, such as the intervenor in this proceeding, may not always prevail in this type of confrontation. The Court has analyzed the totality of the particular facts in this adversary proceeding and the result, while not one that rests comfortably with the Court's sense of equity toward Beverly Poston, is dictated by the particular facts. This is a proceeding where the equities may be argued strongly for both the Trustee and Beverly Poston and a result may be justified for either. After a balancing of all factors, the Court must decide in favor of the Trustee.

DISCUSSION

The Trustee's complaint pleads a cause of action under 11 U.S.C. § 548 that provides —

(a) The trustee may avoid any transfer of an interest of the debtor in property, or any obligation incurred by the debtor, that was made or incurred on or within one year before the date of the filing of the petition, if the debtor voluntarily or involuntarily —

(1) made such transfer or incurred such obligation with actual intent to hinder, delay, or defraud any entity to which the debtor was or became, on or after the date that such transfer was made or such obligation was incurred, indebted; or

(2)(A) received less than a reasonably equivalent value in exchange for such transfer or obligation; and

(B)(i) was insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation;

(ii) was engaged in business or a transaction or was about to engage in business or a transaction for which any property remaining with the debtor was an unreasonably small capital; or

(iii) intended to incur, or believed that the debtor would incur, debts that would be beyond the debtor\'s ability to pay as such debts matured.

Specifically, the Trustee seeks to avoid and recover transfers made to the Maples within one year before the bankruptcy filing, and those transfers total $53,100.00.³ See Trustee's Amended Complaint. The Trustee's complaint relied upon the transfers being made with the debtor's "actual intent to hinder, delay, or defraud" other creditors. 11 U.S.C. § 548(a)(1). The proof demonstrated that the debtor, and its principal Mark Benskin, knew when paying the Maples that there were insufficient assets to satisfy other creditors. The debtors' intent to defraud creditors was established by the guilty pleas to the related criminal charges and preclusive effect may be given to those guilty pleas as factual findings to the extent that the debtors' intent to defraud creditors is required in this adversary proceeding. The indictment to which Mr. Benskin and his company pled guilty is Exhibit 12 to the evidentiary deposition of Mr. Benskin, and it clearly alleges a scheme by both Mr. Benskin and his solely controlled company to defraud creditors, including a scheme to control the investors' funds and to use those funds for the debtors' benefit. By pleading guilty the debtors admitted, among other things, misappropriation of customers', including Beverly Poston's, funds and misrepresentation to customers of the status of or return on their investments. Moreover, the Trustee admitted that the debtor obtained Beverly Poston's funds by fraud. See Stipulated Facts.

In reality, Mr. Benskin and his company maintained no separate client accounts or trust accounts. The evidence clearly established that the debtor used its "escrow" bank account at National Bank of Commerce in Memphis as a general account. Client funds were commingled and deposited there, and clients were paid from that account. However, Mr. Benskin's personal and operating expenses were also paid routinely from that account. In no manner did the debtor treat the "escrow" account as a trust account nor did the debtor segregate client funds. As will be seen, the facts that the debtor controlled the account, that no funds were segregated, and that no separate identity of client funds was maintained will be crucial to the analysis of Beverly Poston's claims.

When the debtor did invest in a nonrestricted account, trades of those accounts resulted in checks payable to the debtor rather than to the debtor's customers. Only when the debtor invested in restricted accounts did the debtor place its customer's name on the account. The debtor did occasionally use restricted accounts, for example to rollover IRA accounts for some customers, such as Danny Livingston, a witness in this proceeding.

The debtor routinely issued false account statements to its customers. The use of such false statements led the customers to believe that investments had been made and that returns were being realized when such information had been fabricated as a part of the debtor's illegal scheme. See, e.g., Exhibit 1, stating that an investment of $137,150.34 from Beverly Poston had been deposited to American Capital Securities Fund "as requested by Ms. Beverly Poston." No such deposit had been made on her behalf or in her name. As to American Capital, the debtor was not an agent for...