In re Universal Clearing House Co.
| Decision Date | 22 April 1986 |
| Docket Number | C-85-0600W,C-85-0655G,C-85-0601W,C-85-0598W,C-85-0597W,Case No. C-85-0650J,Bankruptcy No. 81-02887,C-85-0652G,C-85-0602W and C-85-0603W.,81-02886 and 81-3704 |
| Parties | In re UNIVERSAL CLEARING HOUSE COMPANY, a Trust, aka National Clearing House Company, a Trust, Debtor. In re INDEPENDENT CLEARING HOUSE COMPANY, a Trust, Debtor. In re ACCOUNTING SERVICES COMPANY, a Trust, Debtor. Robert D. MERRILL, Trustee, Plaintiff-Appellee, v. Chad ALLEN, et al., specifically David Manning, Lee Manning, Ray Manning, Keith Manning, Earl Manning, R.J. Rucker, Ron Fish, dba F Street, Thomas R. Garza, and Monty W. Brown, Defendants-Appellants. |
| Court | U.S. District Court — District of Utah |
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William G. Fowler, Salt Lake City, Utah, Robert D. Merrill, trustee, Salt Lake City, Utah, for trustee of debtors.
Daniel W. Jackson, Salt Lake City, Utah, for defendants Ron Fish, dba "F" Street and Thomas R. Garza.
David Manning, Lee Manning, Earl Manning, Keith Manning, Glen Manning, Ray Manning, Monty W. Brown, R.J. Rucker, pro se.
This matter is before the court on appeal from the United States Bankruptcy Court for the District of Utah. The court heard oral argument on December 17, 1985. William G. Fowler appeared on behalf of the trustee, Robert D. Merrill ("Merrill") and Daniel W. Jackson appeared on behalf of appellants, Ron Fish, dba "F" Street ("Fish") and Thomas R. Garza ("Garza"). Appellants R.J. Rucker, David Manning and Ray Manning appeared pro se. Following argument, the court took the matter under advisement. After reviewing the record, the arguments of the parties and their counsel and the pertinent authorities, the court now enters the following decision and order.
These consolidated cases arise from the collapse of an alleged Ponzi scheme.1 The related debtor entities (the clearinghouse companies) were created in 1979 as "Massachusetts" or business trusts, domiciled in the Grand Cayman Islands, British West Indies. The stated business purpose of the clearinghouses was to solicit funds from private investors, called "undertakers," and to use the invested funds to assume the debts and pay the creditors of various client companies. In theory, the clearinghouses would be able to pay their clients' accounts payable at a discount by offering to pay the creditors before the accounts came due. The clients would then pay the clearinghouses the full amount at a later date. The difference between the sums repaid by the clients and the discounted amounts the clearinghouses paid the creditors would provide the undertakers with a handsome return on their investments. In fact, there were no client companies. Money obtained from later investors was used to pay "interest" to earlier investors, creating the illusion that the companies were making money.
On September 16, 1981, Independent Clearing House Company and Universal Clearing House Company filed petitions for relief under chapter 11 of the Bankruptcy Code (the "Code"). Accounting Services Company filed a chapter 11 petition on December 17, 1981.2 On September 25, 1981, the bankruptcy court appointed a trustee pursuant to 11 U.S.C. § 1104. On October 26, 1982, the original trustee resigned, and the court appointed Robert D. Merrill as successor trustee. On March 16, 1982, Mr. Merrill, as trustee, brought the above entitled adversary proceeding to recover funds that the debtors had transferred to approximately 127 sales agents as commission payments for inducing investors to invest with the clearinghouses.
At noticed hearings on March 12 and May 29, 1984, the bankruptcy court considered a motion for summary judgment filed by the trustee. The Honorable John H. Allen took the matter under advisement and, on May 3, 1985, issued an unpublished memorandum opinion granting summary judgment for the trustee.
In its memorandum opinion, the bankruptcy court found that, based upon the pleadings, answers to interrogatories and affidavits, there were no genuine issues of material fact.3 Based on the undisputed facts, the bankruptcy court held that the commission payments received by the sales agents constituted fraudulent conveyances avoidable by the trustee pursuant to 11 U.S.C. § 548(a)(2). It therefore entered judgments against the defendants for the amounts of the commission payments they had received from the debtors.
In their appeal from these judgments, appellants Fish and Garza argue that: (1) the bankruptcy court's ruling that the transfers were property of the debtors and subject to avoidance under 11 U.S.C. § 548 was erroneous; (2) the bankruptcy court erred as a matter of law in ruling that the services rendered by appellants had no legally cognizable value; and (3) the bankruptcy court abused its discretion in granting prejudgment interest to the trustee. Pro se appellants R.J. Rucker and David, Lee, Ray, Earl and Keith Manning argue that: (1) the bankruptcy court lacks subject matter jurisdiction because the bankruptcy petitions filed by the debtors were not filed in compliance with the "good faith" requirements of the Bankruptcy Code; (2) the bankruptcy court lacks subject matter jurisdiction because the debtor enterprises are not "corporations" as contemplated by the Code; and (3) the judgment should be vacated because appellants did not receive notice of the trustee's motion for summary judgment.4
The pro se appellants argue that the bankruptcy court lacks subject matter jurisdiction in this case because the debtor entities cannot qualify as "debtors" under the Bankruptcy Code. A motion to dismiss for lack of subject matter jurisdiction may be made at anytime in a proceeding. The issue of subject matter jurisdiction may also be raised for the first time on appeal.
Generally, an appellate court's review of jurisdictional facts is based on a "clearly erroneous" standard, the same standard that applies to appellate review of other factual issues. See Eaton v. Dorchester Development Co., 692 F.2d 727, 732 (11th Cir.1982); Williamson v. Tucker, 645 F.2d 404, 413 (5th Cir.), cert. denied, 454 U.S. 897, 102 S.Ct. 396, 70 L.Ed.2d 212 (1981). A district court reviewing jurisdictional facts in the context of an appeal from a bankruptcy court should proceed similarly. Bankruptcy Rule 8013.
Appellants argue that the debtors in this case cannot qualify for relief under Title 11. Specifically, they argue that the debtor enterprises are trusts which are not classified as "persons" under the code and are therefore not eligible for relief.5 If the debtor enterprises are ineligible for relief under the Code, then the statutory source of the bankruptcy court's exercise of jurisdiction is lacking and the case must be dismissed.
The focal point of this issue is whether the enterprises are business trusts. The Code's definition of "persons" includes "individual, partnership, and corporation." Id. at § 101(33). The definition of a corporation encompasses, among other entities, a "business trust." Id. at § 101(8)(A)(v). The parties agree, and this court concludes that in order to qualify as debtors under Chapter 11, the clearinghouses must be business trusts.
The nature of the trusts that the clearinghouses purport to be and the language of the trust instruments are not set forth in the record as precisely as they might be. For our purposes, however, the record contains enough evidence to rule on whether the clearinghouses can qualify as business trusts under the Code.
The legislative history of the Bankruptcy Code discusses the definition of "corporation" in general:
The definition of "corporation" in paragraph (8) is similar to the definition in current law, section 1(8). The term encompasses any association having the power or privilege that a private corporation but not an individual or partnership, has; partnership associations organized under a law that makes only the capital subscribed responsible for the debts of the partnership; joint-stock company; unincorporated company or association; and business trust.
S.Rep. No. 989, 95th Cong., 2nd Sess. 22, reprinted in 1978 U.S.Code Cong. & Ad. News 5787, 5808. See also H.R.Rep. No. 595, 95th Cong., 1st Sess. 309 (1977) (containing identical language), reprinted in 1978 U.S.Code Cong. & Ad.News 5787, 6266.
A number of cases have ruled on whether various debtor trusts can qualify as business trusts for bankruptcy purposes. None of those cases, however, have considered trusts that are similar to the trusts involved as debtors in this case. The reported cases, like the legislative history, focus on the similarities between the trust in question and a corporation in determining whether the trust can be classified as a business trust. A frequently cited case succinctly identifies the distinctions between a business trust and a nonbusiness trust:
The basic distinction between business trusts and nonbusiness trusts is that business trusts are created for the purpose of carrying on some kind of business or commercial activity for profit; the object of a nonbusiness trust is to protect and preserve the trust res. The powers granted in a traditional trust are incidental to the principal purpose of holding and conserving particular property, whereas the powers within a business trust are central to its purpose. It is the business trust\'s similarity to a corporation that permits it to be a debtor in bankruptcy.
In re Treasure Island Land Trust, 2 B.R. 332, 334 (Bankr.M.D.Fla.1980). The primary consideration in most cases has been the overt purpose of the trust. If its purpose is to protect the trust res, the trust is found to be ineligible for bankruptcy protection. If the purpose is profit oriented, the trust is found to be an eligible business trust. The trusts involved here did not earn a profit but this fact is not determinative. The purpose of the trust as...
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...a demonstrated lack of good faith can be grounds for dismissal for cause under 11 U.S.C. § 1112(b). See Merrill v. Allen (In re Universal Clearing House), 60 B.R. 985 (D.Utah 1986). Where a hearing is held on a motion to dismiss for lack of good faith, the movant is required to make a prima......
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