In re United Energy Corp.
| Citation | 102 BR 757 |
| Decision Date | 11 August 1989 |
| Docket Number | Bankruptcy No. 3-85-00636 LK,NC-87-2262 VMoP,3-86-0414 TC.,BAP No. NC-87-1843 VMoP,Adv. No. 3-86-0409 LK,3-86-0412 TC,3-86-0413 LK,NC-87-2263 VMoP,3-86-0408 LK,NC-87-2265 VMoP and NC-87-2287 VMoP,NC-87-2264 VMoP |
| Court | Bankruptcy Appellate Panels. U.S. Bankruptcy Appellate Panel, Ninth Circuit |
| Parties | In re UNITED ENERGY CORPORATION, Debtor. (Two Cases) C.H. RIDER & FAMILY, C.H. Rider and Thomas A. Rider, Appellants, v. Frederick S. WYLE, as Trustee of United Energy Corporation and Trustee of Renewable Power Corporation, Appellee. ABCD ENTERPRISES, et al., Martin and Barbara Altbaum, Land and Solar Partners, et al., Plaza Investors V and Cris C. Cris, and Jeanne Bauer, et al., Appellants, v. Frederick S. WYLE, as Trustee of United Energy Corporation and Trustee of Renewal Power Corporation, Appellee. |
Frank R. Ubhaus, Ubhaus & Collins, P.C., San Jose, Cal., Iain A. MacDonald, Goldberg, Stinnett & MacDonald, San Francisco, for appellants.
Patricia S. Mar, Feldman, Waldman & Kline, San Francisco, Cal., for appellee.
Before VOLINN, MOOREMAN and PERRIS, Bankruptcy Judges.
We consider here various related appeals. In BAP No. NC-87-1843, appellants C.H. Rider and Family, a partnership, and C.H. Rider and Thomas A. Rider, individually (hereinafter referred to collectively as Rider), purchased solar energy production modules from debtor United Energy Corporation (hereinafter UEC). The modules were to be paid for by sale of their power production to a related debtor, Renewable Power Corporation (hereinafter RPC). The debtor corporations were instruments in a Ponzi scheme1 whereby the modules never produced power and RPC, the ostensible purchaser of the power, made payments on the basis of fictitious invoices. In fact, the payments made to module owners were derived from payments made by later purchasers of modules. Ultimately, UEC filed a Chapter 11 bankruptcy and RPC was involuntarily petitioned into bankruptcy by the UEC trustee. Rider appeals from a judgment allowing the trustee to recover the payments he received for fictitious power on the theory that the payments were fraudulent transfers since no consideration was furnished therefor.
In BAP Nos. NC-87-2262, NC-87-2263, NC-87-2264, NC-87-2265, and NC-87-2287 (hereinafter consolidated appeals), appellants ABCD Enterprises, Martin and Barbara Altbaum, Land and Solar Partners, Plaza Investors V and Cris C. Cris, and Jeanne Bauer, respectively, were also investors in the debtor's Ponzi scheme. They appeal from partial summary judgments allowing the trustee to recover power payments, which were held as in the Rider adversary to be fraudulent transfers for lack of consideration. For the reasons set forth below we hold that the rulings on appeal should be reversed.
UEC, a Hawaii corporation, began selling solar modules in 1982, primarily to California investors. The modules were purported to produce electricity and thermal energy (hot water). The purchase price for each module was $30,000 to $40,000. Purchasers generally made a down payment of 35% to 43% of the purchase price, the balance financed by long-term, primarily nonrecourse promissory notes payable to UEC in semiannual or annual installments secured only by the modules. Over a three-year sales period, from 1982 to 1985, UEC sold some 5,323 modules for gross sales of over $200 million. UEC collected cash of approximately $83.5 million, of which $66 7 million was from down payments made at the time of purchase and $16.8 million was from installment payments on the promissory notes. The note payments were amortized over a twenty to thirty-year period.
A principal feature of sales promotion was the relationship of solar energy production to the tax structure. The down payment, and more, could be and in many instances was recovered by federal and state income tax credits.2
At the time of purchase, every module purchaser was offered a contract to sell RPC the power which was to be generated. The sole shareholder of RPC was Delphine Lampert, also the sole shareholder of UEC. Her husband, Ernest Lampert, was president of both corporations. RPC was to operate three solar farms at Davis, Borrego Springs, and Barstow, California, where the modules would be located. The contracts with RPC obligated it to purchase, at specified prices per kilowatt and therm, such power as would be produced by the modules and delivered to RPC. The UEC promotional literature advertised that the electricity purchased by RPC would be sold to utilities and that the thermal energy would be used at the solar farms for various business activities of RPC. All but one of the 4,500 module purchasers contracted with RPC to place their modules at one of the solar farms and sell their power to RPC.
Despite sales of thousands of modules, only $3,400 worth of electric power was ever produced for sale to utilities. Consistent with Ponzi strategy, the debtors sold modules to successive waves of customers, for whom they fabricated fictitious kilowatt hours, paying therefor with proceeds of successive module sales. From these proceeds, RPC sent payments totaling $4,754,936, based on false invoices, to module owners. The payments were made quarterly through 1983 and the first three quarters of 1984, in amounts of approximately $300 to $400 per module. Module owners were sent utility-like notices which contained identical kilowatt and therm meter readings for each of the modules. Because RPC had no income or assets of its own, UEC lent funds to another Lampertowned entity, United Financial Corporation, which in turn lent the funds to RPC for making power payments.
The tax credits and power payments created an illusion of credibility, which ended when the California Department of Corporations filed suit against UEC in state court for the illegal sale of securities. RPC ceased making the power payments after the third quarter of 1984, but certain payments by module purchasers on the notes continued until appointment of the bankruptcy trustee in September, 1985. UEC also was able to continue to sell modules to investors seeking year-end 1984 tax shelters, notwithstanding a disclosure, made pursuant to the terms of a preliminary injunction obtained in the state litigation, of the fictitious basis of the power payments.
In April, 1985, UEC filed a voluntary petition for relief under Chapter 11. RPC was involuntarily petitioned into a proceeding as a debtor in December of that year by Frederick S. Wyle as trustee in bankruptcy for UEC. Wyle then served as trustee for both debtors and is appellee in the appeals before us. As trustee, he filed several adversary proceedings to recover the RPC power payments for the estate on the legal theory that those payments were fraudulent transfers.
BAP No. NC-87-1843 (Rider appeal). In 1982, appellant Rider invested in debtors' Ponzi scheme. Rider purchased ten solar modules from UEC for $300,000. Rider paid $120,000 down and later made a total of $39,127.20 in payments on an installment note for the balance. Rider separately executed a power sales agreement with RPC whereby Rider would receive payments for power generated by the modules.
Rider eventually received $23,980.40 as power payments. After UEC and RPC became involved in bankruptcy proceedings, the trustee filed an adversary proceeding against Rider to recover the power payments as fraudulent transfers. The matter was tried and judgment was rendered allowing the trustee to recover the power payments from Rider. Findings of fact and conclusions of law were entered. Rider timely appealed.
BAP Nos. NC-87-2262, NC-87-2263, NC-87-2264, NC-87-2265, and NC-2287 (consolidated appeals). The ABCD Enterprises case involves several hundred module purchasers who were named as defendants in the adversary proceeding brought by the trustee. The other appellants in the consolidated appeals, Martin and Barbara Altbaum, Land and Solar Partners, Plaza Investors V and Cris C. Cris, and Jeanne Bauer, were sued separately by the trustee because of the size of the claims against them. Each of the appellants purchased modules and received payments for the production of fictitious power. After commencement of the bankruptcy proceedings, the trustee filed an adversary proceeding against them to recover the power payments as fraudulent transfers. In each of the adversary proceedings, partial summary judgment was granted to the trustee allowing him to recover the power payments. Findings of fact and conclusions of law were entered. Each appellant timely appealed.
The essential facts are not in dispute. We review the bankruptcy courts' conclusions of law derived therefrom de novo. In re Torrez, 63 B.R. 751, 753 (9th Cir. BAP 1986), aff'd, 827 F.2d 1299 (9th Cir.1987). Grants of summary judgment are also reviewed de novo. Gross v. Petty (In re Petty), 93 B.R. 208 (9th Cir. BAP 1988). Findings of fact made in summary judgment proceedings are not entitled to the "clearly erroneous" standard of review because the trial court has not weighed the evidence in the conventional sense. Am. Fed'n of State, County and Mun. Employees v. Stephens (In re Stephens), 51 B.R. 591, 594-95 (9th Cir. BAP 1985).
A bankruptcy trustee can avoid fraudulent transfers pursuant to state law and/or provisions of the Bankruptcy Code. Section 544(b) of the Bankruptcy Code allows the trustee to avoid any transfers of a debtor's property, which would be avoidable under state law,3 and section 548 provides a federal statutory basis for avoiding fraudulent transfers.
California law and the Bankruptcy Code contain similar definitions of fraudulent transfer. Under the provisions of both statutes, a transfer made by a debtor is fraudulent as to a present creditor if the debtor did not receive a "reasonably equivalent value" in exchange for the...
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