In re Plaza Mortg. and Finance Corp.
| Decision Date | 28 August 1995 |
| Docket Number | Bankruptcy No. A93-65102-JB. Adv. No. 94-6068. |
| Citation | 187 BR 37 |
| Parties | In re PLAZA MORTGAGE AND FINANCE CORPORATION, Debtor. Neil C. GORDON, Trustee in Bankruptcy of the Estate of Plaza Mortgage and Finance Corporation, Plaintiff, v. Martin BASROON; Joseph Girardot; Leslie Johnson; Fred Kaunitz; Nathan Pasha; Ferraro, Wood & Company f/k/a Ferraro, Gensib and Wood f/k/a Saltiel, Basroon, Ferraro, Gensib and Wood f/k/a Saltiel, Basroon and Ferraro; Michael R. Ferraro; Carl D. Gensib; James M. Wood; Rhea Basroon; Ida Basroon; Jody Basroon; and Andrew Basroon, Defendants. |
| Court | U.S. Bankruptcy Court — Northern District of Georgia |
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Larry H. Chesin, Kirwan, Parks, Chesin & Pemar, Atlanta, GA, for plaintiff.
Robert M. Finlayson, II, Mozley, Finlayson & Loggins, Atlanta, GA, for defendants.
In this case, the Court must decide whether the trustee has standing to sue the debtor's former accountants for malpractice and fraud where the debtor was operated as a "Ponzi" or pyramid scheme and where the debtor's president and one of its shareholders was a partner in the defendant accounting firms. This case also involves the issue of whether the trustee's claims are barred by the doctrine of in pari delicto as a result of the wrongful acts of the debtor.
Procedurally, this adversary proceeding is before the Court on two motions filed by Defendants Ferraro, Wood & Company, James M. Wood, Carl D. Gensib, and Michael R. Ferraro (the "Accountant Defendants" or "defendants"):
The main bankruptcy case was commenced by an involuntary petition on April 5, 1993. At the time the petition was filed, a state receivership action was pending in the Superior Court of Fulton County. After a contested hearing, this Court entered an Order for relief under Chapter 11 on June 2, 1993 and appointed a Chapter 11 Trustee.
The Debtor Plaza Mortgage and Finance Corporation ("Plaza") was, prior to the commencement of the bankruptcy case, engaged in the business of providing mortgage financing to higher than normal credit risk borrowers. For purposes of the pending motions, the parties do not dispute that Plaza obtained the funds to make its loans from investors, to whom it promised very high rates of return. After Defendant Martin Basroon became president of Plaza in September of 1988, Plaza was run as a largely fraudulent enterprise, organized as a Ponzi scheme.1 Plaza remained in business not on the basis of earnings from loans made to borrowers, but on the basis of money received from new investors.
In this adversary proceeding, the trustee has asserted claims against a number of defendants including Plaza's former president, Martin Basroon (both in his capacity as an officer of Plaza and in his capacity as a partner in the defendant accounting firms which performed work for Plaza), Plaza's former attorney, a former employee of Plaza, one of Plaza's founding shareholders, the accounting firms used by Plaza, and the partners of those accounting firms.2 All of the defendants are alleged to have participated with the debtor in the Ponzi scheme.
The complaint contains many allegations as to all defendants and separate allegations and claims as to each defendant. With respect to the Accountant Defendants, the trustee contends that Plaza suffered injury as a result of the accountants' negligence and as a result of Basroon's fraud as an accountant. The trustee has alleged, inter alia, that the accountants were hopelessly negligent in failing to implement any controls or supervisory procedures to prevent mistakes or fraud.
In the Standing Motion, the Accountant Defendants argue that the trustee lacks any standing to bring the claims asserted against the Accountant Defendants, as these claims really belong to the investors. Alternatively, defendants argue that if the trustee has any claims, they are barred as a matter of law by the doctrine of in pari delicto.
The case law is well-established that a trustee in bankruptcy lacks standing to assert claims on behalf of investors/creditors of a debtor as opposed to claims belonging to the debtor. Caplin v. Marine Midland Grace Trust Co. of New York, 406 U.S. 416, 92 S.Ct. 1678, 32 L.Ed.2d 195 (1972); E.F. Hutton & Co. Inc. v. Hadley, 901 F.2d 979 (11th Cir.1990); Williams v. California 1st Bank, 859 F.2d 664 (9th Cir.1988). It is also clear that causes of action belonging to the debtor are included as property of the estate under 11 U.S.C. § 541(a)(1) and may be asserted by the trustee. Here, the trustee maintains that his claims are asserted on behalf of the debtor and are for injuries to the debtor due to the accountants' negligence and Defendant Martin Basroon's fraud. Defendants respond by arguing that the claims are "really" brought on behalf of the investors/creditors, citing a number of cases dismissing claims asserted by trustees against alleged participants in Ponzi schemes.
Standing is jurisdictional in nature, and whether plaintiff has standing is a threshold inquiry. E.F. Hutton, 901 F.2d at 983. The cases cited by Defendants show that it is difficult for a trustee in bankruptcy to maintain a claim against a third party who participated with the debtor in defrauding creditors. The starting point for analyzing a trustee's standing here is the 1972 Supreme Court case of Caplin v. Marine Midland Grace Trust Co. In Caplin, the Supreme Court held that a trustee in a reorganization under Chapter X of the Bankruptcy Act did not have standing to assert, on behalf of persons holding debentures issued by the debtor, claims of misconduct by an indenture trustee. Caplin was a five-to-four decision and the Court noted that the issue was "a difficult one" and has caused "even the most able jurists to disagree." Caplin, 406 U.S. at 421-22, 92 S.Ct. at 1682. Deciding that the trustee in a reorganization lacked standing, the Court found that nowhere in the statutory scheme of the Bankruptcy Act or the Trust Indenture Act of 1939 was there a suggestion that the trustee in a reorganization was to assume the responsibility of suing third parties on behalf of debenture holders. Second, the trustee in Caplin did not argue that the debtor had any claim against the indenture trustee and the "conspicuous silence on this point is a tacit admission that no such claim could be made." Id. at 429, 92 S.Ct. at 1686. Third, the Court held that a suit by the trustee may be inconsistent with independent actions by debenture holders.
In Williams and E.F. Hutton, the Ninth and Eleventh Circuits found the trustees in bankruptcy lacked standing to sue third parties who participated with the debtors in Ponzi schemes. Both courts found it significant that when Congress rewrote the bankruptcy laws in 1978, it considered and rejected a provision which would have overruled Caplin. However, in both of these cases, the trustees were clearly asserting claims belonging to creditors, and not claims belonging to the debtor. In Williams, the trustee had taken an assignment of creditors' claims, and the court found the debtor had no claim of its own against the defendant bank. In E.F. Hutton, the trustee conceded he was asserting claims of customer creditors rather than the debtor entity. The court also stated: "We emphasize that our holding is restricted to the specific facts in this case." E.F. Hutton, 901 F.2d at 985.
Defendants rely on Feltman v. Prudential Bache Sec., 122 B.R. 466 (S.D.Fla.1990), a case in which the trustee alleged that the debtor had been injured, but the court still dismissed the trustee's claims for lack of standing. The rationale in Feltman, however, is not particularly compelling here. There, the Chapter 11 trustee and the unsecured creditors committee of two corporate debtors sued a brokerage house, bankers, and accountants that defrauded investors in a massive embezzlement scheme. The trustee alleged that the debtors were injured by defendants' fraud and by their allowing the debtor to continue in business past the point of insolvency.3 Holding that the trustee could not assert claims based on injury to the debtor corporations, the court found the debtor corporations could not be injured, because they were "sham" corporations. Thus, the court concluded "any alleged injury to the debtors is as illusory as was their corporate identity." Id. at 474. Here, there is no allegation that Plaza was a sham corporation. Furthermore, the result is troublesome if it means that the bankruptcy process is of no utility for creditors of Ponzi scheme debtors. Under the Feltman reasoning, in such a case the trustee's hands are tied and each creditor is on his or her own.
The other reason given in Feltman for dismissing the trustee's claims was that it would be inequitable for the trustee to recover against these defendants. The court stated that defrauded creditors would have their own claims against the same defendants and if the trustee sued for damages, this would deprive the creditors of standing to raise those claims. Id. The court's rationale is hard to follow. If the trustee and the creditors have different claims, and if the trustee recovers and makes a distribution to creditors, this does not deprive the creditors of standing to bring their claims. It only reduces their damage claim to the extent they have received a distribution from the estate. See Drabkin v. L & L Constr. Assoc. (In re Latin Inv. Corp.), 168 B.R. 1, 6 (Bankr. D.D.C.1993).
Defendants also cite Begier v. Price Waterhouse, 81 B.R. 303 (E.D.Pa.1987), but that case does not support defendants' position. There, the court dismissed one count of a complaint brought by a Chapter 11 truste...
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