In re Nat'l Century Financial Enterprises Inc.

• Decision Date: 12 April 2011
• Docket Number: Case Nos. 2:03–md–1565,2:04–cv–1090.
• Citation: 783 F.Supp.2d 1003
• Parties: In re NATIONAL CENTURY FINANCIAL ENTERPRISES, INC., Investment Litigation.The Unencumbered Assets, Trust, et al., Plaintiffs,v.JP Morgan Chase Bank, et al., Defendants.
• Court: U.S. District Court — Southern District of Ohio

783 F.Supp.2d 1003

In re NATIONAL CENTURY FINANCIAL ENTERPRISES, INC., Investment Litigation.The Unencumbered Assets, Trust, et al., Plaintiffs,

v.JP Morgan Chase Bank, et al., Defendants.

Case Nos. 2:03–md–1565

2:04–cv–1090.

United States District Court,S.D. Ohio,Eastern Division.

April 12, 2011.

Leon Friedberg, H. Ritchey Hollenbaugh, Carlile Patchen & Murphy LLP, Columbus, OH, Brandon T. Allen, Jeffy J. Cotner, Kathy D. Patrick, Robert J. Madden, Scott Humphries, Sydney Gibbs Ballesteros, Gibbs & Bruns, LLP, Houston, TX, for Plaintiffs.Thomas Leslie Long, Baker & Hostetler, Columbus, OH, Jason M. Koral, William H. O'Brien, William J. Schwartz, Cooley Godward Kronish, New York, NY, Jeffrey Q. Smith, Steven G. Brody, Susan F. DiCicco, Bingham McCutchen LLP, New York, NY, Mina Audrey Kim, Kronish Lieb Weiner & Hellman LLP, New York, NY, Robert Colby Allsbrook, King & Spalding LLP, New York, NY, for Defendants.

OPINION AND ORDER ON CREDIT SUISSE'S MOTION FOR SUMMARY JUDGMENT IN THE UNENCUMBERED ASSETS TRUST CASE

JAMES L. GRAHAM, District Judge.

This matter is before the court on defendant Credit Suisse's motion for summary judgment on the claims brought by the Unencumbered Assets Trust (“UAT”). The UAT was created in bankruptcy court to pursue legal causes of action belonging to debtor National Century Financial Enterprises, Inc. and its subsidiaries. In this action, the UAT brings various claims against Credit Suisse for its alleged role in assisting National Century's principals (the “Founders”) in looting funds from two National Century subsidiaries, NPF VI and NPF XII.

Credit Suisse argues that it is entitled to summary judgment under the equitable defense of in pari delicto, whereby a plaintiff cannot recover for injuries caused by his own wrongdoing. Credit Suisse contends that the UAT, standing in the shoes of the debtors, may not recover for the debtors' injuries because the Founders controlled the debtors and caused their injuries. The UAT responds that the Founders' wrongdoing should not be imputed to the debtors and that equitable considerations—namely, Credit Suisse's alleged knowing participation in the wrongdoing—should cause this court to refrain from applying in pari delicto.

Also at issue are the UAT's claims under the Bankruptcy Code to avoid and recover a $100 million payment made by NPF XII to Credit Suisse about 5 months before the debtors went bankrupt. Credit Suisse argues that the transfer is protected from avoidance because, among other things, it was payment on a secured loan.

For the reasons set forth below, the court grants the motion for summary as to the UAT's civil claims because they are barred by the in pari delicto defense. The court also grants the motion as to the bankruptcy claims because a transfer to a creditor on a fully secured debt is not avoidable either as a preferential transfer or a fraudulent transfer.

I. BACKGROUND

The parties to the National Century multidistrict litigation have conducted exhaustive discovery. The facts material to the in pari delicto inquiry are not genuinely disputed, unless noted.

A. National Century

The Founders—Lance Poulsen, Donald Ayers, and Rebecca Parrett—formed National Century as an Ohio corporation in 1990. At all times, the Founders owned a controlling stake in National Century and occupied the positions of executive authority.¹ Poulsen served as president, chairman, and director. Ayers was vice chairman, chief operating officer, and director. Parrett served as vice chairman and director, as well as secretary and treasurer. Lance Poulsen's wife, Barbara Poulsen, served as secretary, treasurer, and director. The Founders owned 100% of National Century until July 1998, when the Beacon Group III–Focus Value Fund, L.P. purchased a 19% equity position in the company. This purchase gave the Focus Value Fund the right to appoint two outside directors to National Century's six-member board.

National Century's business was to purchase accounts receivable at a discount from healthcare providers. Several corporate subsidiaries were established to carry out this task. NPF VI, Inc. and NPF XII, Inc. were wholly-owned subsidiaries formed in Ohio in 1995 and 1999 respectively. They functioned as special purpose corporations through which National Century purchased accounts receivable and raised capital by issuing investment-grade notes. See UAT Ex. Exs. 468 and 469, Articles of Incorporation at § 3. National Premier Financial Services, Inc. was also a wholly-owned subsidiary formed in Ohio, and it performed the role of “Servicer.” It made purchasing decisions on behalf of NPF VI and NPF XII, monitored and collected payments on purchased receivables, kept records, and maintained reserve accounts for NPF VI and NPF XII. See CS Exs. 5 and 6, Master Indenture Agreements at § 5.04(b).

As they did with National Century, the Founders occupied the officer and director positions of NPF VI, NPF XII, and the Servicer. Poulsen was the president, treasurer, and director of NPF VI and NPF XII, while Ayers and Parrett filled the positions of chairman, vice president, secretary and director. See CS Ex. 2 at CSFB–2004 0028595; CS Ex. 3 at CSFB–2004 0057932; CS Ex. 103; CS Ex. 128. Poulsen served as president, treasurer, and sole director of the Servicer, while Ayers, Parrett, and Barbara Poulsen served as vice presidents. See CS Exs. 219, 220. Though NPF VI and NPF XII technically had an independent director, the individual who filled that position testified that he was a close friend of Donald Ayers, had no knowledge about NPF VI or NPF XII, and signed documents given to him by Ayers and Parrett without asking questions. See CS Reply Ex. 59, April 3, 2008 Dep. of Vincent Margello at 30, 42, 50–52, 58.²

It is undisputed that the Founders used their authority at National Century to commit a multibillion dollar fraud. The mechanics of the fraud have been thoroughly detailed in orders of this court (in the multidistrict litigation, in the criminal proceedings against National Century's executives, in civil enforcement actions brought by the Securities and Exchange Commission, and in numerous bankruptcy matters appealed to this court), as well as in orders of the Sixth Circuit in the appeals of the criminal convictions, and in orders of the bankruptcy court overseeing the Chapter 11 liquidation of National Century and its subsidiaries. See, e.g., U.S. v. Faulkenberry, 614 F.3d 573, 577–79 (6th Cir.2010); In re Nat'l Century Fin. Enterprises, Inc., Inv. Litig., 617 F.Supp.2d 700, 705–07 (S.D.Ohio 2009); U.S. v. Poulsen, 568 F.Supp.2d 885, 890–912 (S.D.Ohio 2008); In re Nat'l Century Fin. Enterprises, Inc., Inv. Litig., No. 2:03–md–1565, 2006 WL469468 at * *1–6 (S.D.Ohio Feb. 27, 2006); In re Nat'l Century Fin. Enterprises, Inc., 341 B.R. 198, 209–10 (Bankr.S.D.Ohio 2006).

Briefly stated, National Century used NPF VI and NPF XII to issue investment-grade notes, representing them to be secured by healthcare receivables National Century obtained in the regular course of its business. The Master Indentures governing the NPF note programs required NPF VI and NPF XII to purchase “eligible” receivables, those that satisfied certain criteria designed to ensure that the receivables were of high quality. See CS Exs. 5 and 6, Master Indentures at § 5.04 and at Ex. 2 (Sale and Subservicing Agreement at § 4.2).

In reality a great deal of the accounts receivable that NPF VI and NPF XII “purchased” were worthless or non-existent. Many of the advances of funds went to healthcare companies in which the Founders held undisclosed ownership interests. What appeared on paper to be legitimate transactions in fact amounted to little more than transfers of corporate funds into companies in which the Founders had financial interests. In testimony given in the criminal proceedings against the Founders, a government witness provided a four-year snapshot of the fraud at National Century. He found that National Century had made $1.3 billion in unsecured advances in that time window to eight healthcare providers, seven of which the Founders held an ownership stake. See Poulsen, 568 F.Supp.2d at 900. By the time National Century went bankrupt in November 2002, investors suffered losses of well over $2 billion.

The Sixth Circuit summarized the fraud as follows:

The record before us makes unmistakably clear that NCFE's representations were false. NCFE executives lied to investors in sales presentations; they lied to them in the governing documents for bond sales; and they lied to them in monthly investor reports that showed NCFE in full compliance with the obligations recited above. This practice of deception was continuous from approximately 1995 to October 2002, when NCFE ceased operations.

The deception centered on the practice of “advancing.” Contrary to what it told investors, NCFE routinely advanced funds to healthcare providers without obtaining any receivables, much less eligible ones, in return. NCFE apparently just fronted these monies—investor monies—with the hope that someday the provider would pay them back. Indeed, some providers were already so buried in debt that even the hope must have been absent. Moreover, the advances were large and focused on only a handful of providers, which meant that NCFE blew past its concentration limits as well.

Faulkenberry, 614 F.3d at 578.

Following a jury trial, Lance Poulsen was found guilty of multiple counts of securities fraud, wire fraud, and conspiracy to commit securities and wire fraud. See U.S. v. Poulsen, 2:06–cr–129 (S.D.Ohio) at doc. 857. He was sentenced to 30 years in prison. Id. at doc. 1009. Parrett was found guilty by a jury of multiple counts of securities fraud, wire fraud, and conspiracy to commit securities and wire fraud. Id. at doc. 531. Parrett, who fled the country after her conviction, received a sentence of 25 years in prison. Id. at doc. 982. Ayers was found guilty by a jury of multiple counts of...