In re World Vision Entertainment, Inc.

• Decision Date: 29 March 2002
• Docket Number: Adversary No. 00-00251.,Bankruptcy No. 99-07440-6J1.
• Citation: 275 B.R. 641
• Parties: In re WORLD VISION ENTERTAINMENT, INC., Debtor. R.W. Cuthill, Jr., Trustee, Plaintiff, v. Greenmark, LLC; First South Financial Corporation; American Retirement Association; Chadrick Weaver; Greenleaf Marketing Corporation; Dennis Weaver; and Larry Jones, Defendants.
• Court: U.S. Bankruptcy Court — Middle District of Florida

275 B.R. 641

In re WORLD VISION ENTERTAINMENT, INC., Debtor R.W. Cuthill, Jr., Trustee, Plaintiff, v. Greenmark, LLC; First South Financial Corporation; American Retirement Association; Chadrick Weaver; Greenleaf Marketing Corporation; Dennis Weaver; and Larry Jones, Defendants.

Bankruptcy No. 99-07440-6J1.

Adversary No. 00-00251.

United States Bankruptcy Court, M.D. Florida, Orlando Division.

March 29, 2002.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

James R. Leone, New Smyrna Beach, FL, for debtor.

R.W. Cuthill, Jr., Winter Park, FL, trustee.

R. Scott Shuker, Orlando, FL, for trustee.

AMENDED FINDINGS OF FACT AND CONCLUSIONS OF LAW ON TRUSTEE'S COMPLAINT TO RECOVER FRAUDULENT TRANSFERS AND TO PIERCE THE CORPORATE VEIL

KAREN S. JENNEMANN, Bankruptcy Judge.

The Chapter 11 trustee, R.W. Cuthill, Jr., filed this adversary proceeding against four corporate defendants asserting that they received fraudulent transfers of brokers' fees totaling $559,515 paid in connection with a Ponzi scheme operated by the debtor. The trustee next seeks to pierce the corporate veil alleging that the three individual defendants are personally liable for the repayment of the fraudulent transfers because they are mere alter egos of the corporate defendants. For the reasons discussed below, judgment in the amount of $569,595.30 is entered in favor of the trustee and against the corporate defendants and one of the individual defendants, Dennis Weaver.

The three individual defendants are Dennis R. Weaver ("Weaver"), his son, Chadrick Weaver ("Chad") (collectively, the "Weavers"), and Weaver's friend and former business partner, Larry H. Jones ("Jones"). The four corporate defendants are companies created, controlled, and operated by Weaver or Jones and include Greenleaf Marketing Corporation ("Greenleaf"), Greenmark, L.L.C. ("Greenmark"), First South Financial Corporation ("First South"), and American Retirement Association, Inc. ("ARA") (collectively, the "Corporate Defendants"). At trial, held on October 15, 16 and November 8, 2001, the trustee withdrew his claims to pierce the corporate veil against Chad and Jones. Therefore, the trustee now seeks to recover the alleged fraudulent transfers only from the Corporate Defendants and Weaver.¹

The defendants raise several defenses to the trustee's allegations that the brokers' fees they received are fraudulent transfers. They assert that the debtor was operating a legitimate, albeit unprofitable, business and not a Ponzi scheme. The defendants also assert that they acted as independent brokers selling the debtor's nine-month promissory notes for which they earned a fair commission for their services. Because the defendants were not insiders of the debtor, they argue that they had no reason to know the debtor was insolvent, and that they merely received, in good faith, a reasonably equivalent value for their services in the form of commission payments for the notes they sold. Defendants also argue that the trustee's alter ego claims fail because they are not, per se, a cause of action and because the trustee failed to allege that Weaver completely dominated and controlled the Corporate Defendants. To untangle the trustee's fraudulent transfer claims and the defendants' good faith defenses, one first must understand the history of the debtor and its operations.

The Debtor's Nine-Month Promissory Note Sales Program. Jamie Piromalli formed the debtor, World Vision Entertainment, Inc., as a Florida corporation in 1994. The debtor promoted itself as an entertainment investment company. In 1996, the debtor started selling nine-month promissory notes with annualized interest rates varying between 10.9 and 11.9 percent. Investors could collect their interest monthly or at the end of the nine-month term in a lump sum together with their principal investment. Although the notes were unsecured, investors received a certificate of insurance promising full repayment if the debtor defaulted. At the expiration of each nine-month term, the debtor encouraged investors to reinvest their principal for additional nine-month terms.

Between June 1996 and September 1999, the debtor sold nine-month notes totaling approximately $62 million in 33 states to approximately 1,200 investors. The investors typically were elderly people living on a fixed income. They lacked financial sophistication and often invested their retirement savings into the note program relying on the advice of their broker.

The debtor did not directly sell most of the promissory notes. Instead, the debtor actively solicited and recruited a network of brokers, primarily insurance agents, to sell the notes in exchange for a generous commission. Commission rates ranged from 12 to 15 percent. Brokers received a commission payment both when notes were sold and also when notes were renewed. The defendants in this adversary proceeding received commissions averaging 14 percent of the total notes sold.

In order to sell the notes, the debtor had to convince investors that their money would be invested in legitimate ventures. The debtor produced and distributed slick, professional marketing materials touting its business and describing the note program. (Defendants' Exh. Nos. 14-18). The marketing materials either did not discuss or downplayed any risks associated with the notes. (Trustee's Exh. No. 53). Further, to allay concerns or quell any investor anxiety, investors received certificates of insurance allegedly guaranteeing repayment.

Ultimately, the debtor's nine-month promissory note program collapsed. In spring 1999, the debtor defaulted on the note payments. Three years after implementing the note program, on September 3, 1999, the debtor filed its Chapter 11 bankruptcy petition. Approximately $52 million of the notes remain unpaid and outstanding.

The Trustee's Examination into the Debtor's Promissory Note Program and Investments. On October 25, 1999, R.W. Cuthill Jr., the plaintiff, was appointed as the Chapter 11 trustee to identify, recover, and distribute assets primarily to unpaid investors. He is a certified fraud examiner and certified public accountant specializing in forensic accounting and is eminently qualified to do this job. Upon his appointment, the trustee assumed control of the debtor's books and records from Seth Miller, an accountant employed by the debtor. The trustee also obtained a database tracking sales of the debtor's promissory notes and completed a thorough review of the debtor's financial history.

Based on his review, the trustee filed this adversary proceeding, along with many others, alleging that the debtor's note program was a massive Ponzi scheme. At trial, the trustee was qualified as an expert in insolvency and testified about the debtor's financial records, business operations, promissory note program, and the quantity and quality of the debtor's investments. The Court finds that the trustee's testimony was convincing, well founded, and credible.

The debtor primarily used monies received from new investors to pay older investors' claims. Other monies were used to fund the exorbitant costs associated with the note program, including the high commissions paid to brokers, such as the Corporate Defendants, to induce the brokers to continue selling the debtor's notes. Officers and directors of the debtor directly withdrew large sums of investor funds. The debtor used only a small portion of the $62 million received in note proceeds to invest in operating businesses selling actual products or services. The debtor never harbored any realistic expectation of paying the notes in full through profits earned from these investments. Every note sold simply made the debtor even more insolvent.

The trustee offered substantial support for his conclusion that the debtor's primary business was running a Ponzi scheme. For example, the trustee prepared and filed the debtor's tax returns for the years 1996 through 1999. (Trustee's Exh. Nos. 55-58). The returns demonstrate the debtor's continuing financial decline over the four-year period. In 1996, the debtor received $4,703,379 in paid-in capital, primarily through the sale of its promissory notes, and had a retained earnings deficit of $5,396,588, resulting in a $693,209 net shareholder deficit by the end of 1996. (Trustee's Exh. No. 55). In 1997, the debtor received $17,722,504 in paid-in capital, again largely derived from note sales, and incurred a retained earnings deficit of $18,958,682, resulting in a $1,236,178 net shareholder deficit by year's end. (Trustee's Exh. No. 56). In 1998, the debtor received $22,705,837 in paid-in capital from the sale of promissory notes and incurred a retained earnings deficit of $32,142,632, resulting in a $9,436,795 net shareholder deficit by the end of 1998. (Trustee's Exh. No. 57). By 1999, the debtor's retained earnings deficit had increased to $40,730,976, yielding a net shareholder deficit of $18,025,139 at the time the Chapter 11 case was filed. (Trustee's Exh. No. 58).

The trustee also used the debtor's financial records to explain the debtor's sources and uses of funds from 1994 through 1999. (Trustee's Exh. No. 59). Although the debtor had four sources of funds, the debtor obtained most of its money from note sales. The debtor, through its network of agents, sold approximately $62 million of promissory notes between June 1996, and September 1999.

The other funds received by the debtor during this period are relatively small. In 1994, the debtor received $500 in initial capital. In 1995, the debtor received a total of $159,485 from three private stock offerings as legitimate invested capital. Also in 1995, the debtor received approximately $4,059,796 in loans from insiders. However, of this amount, approximately $4,000,000 was repaid in 1997. Significantly, the debtor received no income from the debtor's various alleged business investments.

In addition to examining the debtor's sources of funds,...