In re Universal Clearing House Co.
| Decision Date | 01 April 1986 |
| Docket Number | Civ. No. C-85-0321W,Bankruptcy No. 81-02887,81-02886 and 81-03704. |
| Citation | 62 BR 118 |
| 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. Thomas J. DIETZ, Defendant/Appellant. |
| Court | U.S. District Court — District of Utah |
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Daniel W. Jackson, Salt Lake City, Utah, for defendant/appellant, Thomas J. Dietz.
William G. Fowler, Robert D. Merrill, Salt Lake City, Utah, for plaintiff/appellee and trustee, Robert D. Merrill.
This matter is before the court on appeal from the United States Bankruptcy Court for the District of Utah. Oral argument was heard by the court on December 10, 1985. Daniel W. Jackson appeared on behalf of the appellant, Thomas J. Dietz ("Dietz"), and William G. Fowler appeared on behalf of the appellee and trustee, Robert D. Merrill ("Merrill"). Following argument, the court took the matter under advisement. After reviewing the record, the arguments of counsel and the pertinent authorities, the court now enters the following decision and order.
On September 23, 1983, the trustee of the above-referenced debtors filed the present action against appellant Dietz seeking an accounting and recovery of some of the debtors' funds allegedly diverted to Dietz by principals of the debtors. The United States Bankruptcy Court for the District of Utah, 41 B.R. 985, entered judgment in favor of the trustee and against Dietz in the sum of $65,000 with interest from the date of the filing of the complaint. The judgment was based on the bankruptcy court's conclusion that certain of the transfers were subject to avoidance under 11 U.S.C. § 544 and § 548 and that the value of those transfers was recoverable from Dietz pursuant to 11 U.S.C. § 550.
Appellee Merrill is the duly appointed and acting trustee of the related debtor entities, Universal Clearing House Company, Independent Clearing House Company, Accounting Services Company, Tonder Payable Service Company and Payable Accounting Company (the "Clearinghouses").1 The stated business purpose of the Clearinghouses was to solicit funds from private investors, called "undertakers," and to use the invested funds to assume and pay the creditors of various client companies. In theory, the Clearinghouses would be able to pay off 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 investment. In fact, there were no client companies. Money 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. 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.
The trustee brought this adversary proceeding in order to recover funds of the debtors allegedly diverted to Dietz. The funds at issue in this appeal were transferred on five occasions. The first transfer occurred on or about January 6, 1981 when a cashier's check in the amount of $10,000 made payable to Thomas Dietz was purchased by Tonder Payable Company. Mr. Dietz received that $10,000. The next two transfers took place on or about April 20, 1981 and May 12, 1981 when Dietz received two checks, numbered 5 and 108, drawn on the account of LaPage Corporation, an entity which had received funds from the debtors. The other two occasions involved transfers of funds from the debtor companies to third parties which the trustee contended were made for the benefit of Dietz. The first of these involved check number 229 dated November 17, 1980. This check, drawn on the account of Baltimore Investments and made payable to Warren & Sommer was to be applied to the account of Thomas Dietz.3 The second occurred on or about March 23, 1981 when check number 729 in the sum of $10,000 was drawn on the account of Accounting Services Company and paid to a Mr. Theadore Ayervais.
Dietz contends the evidence at trial established he was an innocent recipient of funds transferred to him by entities other than the debtors and also established he was unaware that the funds in question had originated from the debtors. He argues that because he gave value for the transfers, in good faith and without knowledge of the prior transfers from the debtors, he was entitled to the protections contained in 11 U.S.C. § 550(b)(1). Dietz alternately contends that the transfers he received are not avoidable under 11 U.S.C. § 548 because the debtors had no interest in the property transferred. Finally, he argues that the bankruptcy court abused its discretion in granting prejudgment interest to the trustee.
"Property" of the Debtor
A trustee's powers to avoid prepetition transfers by the debtor are statutory, and the starting point in any case of statutory interpretation is the language of the statute itself. Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 756, 95 S.Ct. 1917, 1935, 44 L.Ed.2d 539 (1975) (Powell, J., concurring). The relevant statutory language is contained in 11 U.S.C. §§ 544, 548. Section 548(a) allows the trustee to avoid "any transfer of an interest of the debtor in property" if the transfer meets certain conditions. Dietz contends that the transfers at issue here were not transfers of the debtors' "property" and thus could not be avoided under section 548. As a preliminary matter, we must therefore decide whether the money the trustee seeks to recover was "property" of the debtor. If it was not, the trustee had no statutory basis for recovering it.
Nowhere does the Code define "property of the debtor" or "an interest of the debtor in property." Therefore, we must resort to nonbankruptcy law to determine whether payments to the defendants were transfers of the debtors' "property." See First Fed. Sav. & Loan Ass'n of Bimarck, Inc. v. Hulm (In re Hulm), 738 F.2d 323, 326 (8th Cir.), cert. denied, ___ U.S. ___, 105 S.Ct. 398, 83 L.Ed.2d 331 (1984); 4 Collier on Bankruptcy ¶ 541.021 at 541-10 to -11 (L. King 15th ed. 1985) ("the existence and nature of the debtor's interest in property . . . are determined by nonbankruptcy law"). Since state law both creates and defines property interests, Butner v. United States, 440 U.S. 48, 55, 99 S.Ct. 914, 918, 59 L.Ed.2d 136 (1979), we must look to state law to resolve the question.4
We note initially that the cases are unanimous, both under the old Bankruptcy Act of 1898, Pub. L. No. 62-57, 30 Stat. 544 (), and under the Bankruptcy Reform Act of 1978, Pub. L. No. 95-598, 92 Stat. 2549 () ("the Code"), that the trustee in bankruptcy could recover as preferential and fraudulent transfers at least some of the payments that the debtor had made to investors in a Ponzi scheme. Cunningham v. Brown, 265 U.S. 1, 44 S.Ct. 424, 68 L.Ed. 873 (1924); Henderson v. Allred (In re Western World Funding, Inc.), 54 B.R. 470 (Bankr.D.Nev.1985); Lawless v. Anderson (In re Moore), 39 B.R. 571 (Bankr. M.D.Fla.1984). See also Rosenberg v. Collins, 624 F.2d 659 (5th Cir.1980) (); Edmondson v. Bradford-White Corp. (In re Tinnell Traffic Servs., Inc.), 41 B.R. 1018 (M.D.Tenn.1984) (fraudulent transaction).
Dietz argues that the prior cases are distinguishable from this since, under the state law applicable at the time, one who obtained possession of property had defeasible title to the property, even if he obtained it by tortious or criminal means. On the other hand, he argues, under applicable modern law a person who acquires property of another by fraud has no title to or interest in the property whatsoever.
As support for this proposition, Dietz cites Corporation of the President of the Church of Jesus Christ of Latter-day Saints v. Jolley, 24 Utah 2d 187, 467 P.2d 984 (1970). There, the Utah Supreme Court stated, without citation:
Where one has stolen or embezzled the money or property of another, he obtains no title whatsoever. A constructive trust may be impressed upon it in his hands; and equity may continue the trustee effective against any subsequent transferee, unless transferred to a bona fide purchaser and under circumstances where equity would require a different result.
467 P.2d at 985. Dietz argues that the same rule applies to one who obtains money by fraud — that is, that he obtains no title to the money. See Heyman v. Kemp (In re Teltronics, Ltd.), 649 F.2d 1236, 1239 (7th Cir.1981) (). See also, Giannone v. Cohen (Matter of Paragon Sec. Co.), 589 F.2d 1240, 1242 (3d Cir. 1978); Nicklaus v. Bank of Russellville, 336 F.2d 144, 146 & 147 (8th Cir.1964) (). Dietz reasons that if the debtors never had any interest in the money, then it was never the debtors' "property," and...
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Schneider v. R. Kenneth Barnard, of Janitorial Close-Out City Corp.
...1984) (defining a Ponzi scheme and describing its history), aff'd in part, rev'd in part sub nom. Merrill v. Dietz (In re Universal Clearing House Co.), 62 B.R. 118 (D.Utah 1986). Because “[t]he investor pool is a limited resource and will eventually run dry,” the Ponzi scheme operator “mus......