Perkins v. Champagne (In re Int'l Mgmt. Assocs., LLC)

• Decision Date: 23 May 2013
• Docket Number: Bankruptcy No. 06–62966–pwb.,Adversary No. 08–06223.
• Citation: 495 B.R. 96
• Parties: In re INTERNATIONAL MANAGEMENT ASSOCIATES, LLC, Debtors. William F. Perkins, in his capacity as Plan Trustee for the estate of International Management Associates, LLC, Plaintiff, v. Jessie Champagne and Joyce Champagne, Defendants.
• Court: U.S. Bankruptcy Court — Northern District of Georgia

495 B.R. 96

In re INTERNATIONAL MANAGEMENT ASSOCIATES, LLC, Debtors.

William F. Perkins, in his capacity as Plan Trustee for the estate of International Management Associates, LLC, Plaintiff,

v.Jessie Champagne and Joyce Champagne, Defendants.

Bankruptcy No. 06–62966–pwb.

Adversary No. 08–06223.

United States Bankruptcy Court,

N.D. Georgia,

Atlanta Division.

May 23, 2013.

Colin Michael Bernardino, John W. Mills, III, Kilpatrick Townsend & Stockton LLP, Atlanta, GA, for Plaintiff.

Thomas D. Brumbaugh, Champagne & Brumbaugh, Lafayette, LA, for Defendants.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

PAUL W. BONAPFEL, Bankruptcy Judge.

The Plaintiff is the Plan Trustee under the confirmed Chapter 11 plan for the substantively consolidated estate of International Management Associates, LLC, and has authority to exercise the rights of a bankruptcy trustee to recover avoidable transfers for the benefit of creditors. The Plan Trustee, proceeding under 11 U.S.C. § 544(b), seeks to recover, as fraudulent transfers under state law, the so-called “fictitious profits” that the Defendants received on their “investments” in a Ponzi scheme in which IMA and its affiliates were engaged.¹

The Court consolidated this proceeding with others for trial on the issue of whetherthe Debtors in the consolidated cases had operated a “Ponzi” scheme. [Docket No. 29]. At the conclusion of the evidence at the trial on this issue, the Court announced its findings of fact on the record and entered an order confirming its finding that Kirk Wright, the principal of IMA and its affiliates, had operated IMA and its affiliates as a Ponzi scheme during the period from October 1, 1997, through February 17, 2006. [Docket No. 42]. Those findings of fact apply in this proceeding under the consolidation order.

At the trial of remaining issues in this matter, the parties stipulated to the facts concerning the transfers of funds between the Defendants and the Debtors and agreed that the Court could find the facts on the basis of the record before the Court.

The dispositive issue is whether Georgia or Louisiana law governs the Trustee's claims. The Plan Trustee is entitled to judgment in his favor if Georgia law applies, but his action is time-barred and must be dismissed if Louisiana law applies.

For reasons set forth below, the Court concludes that Georgia law governs this matter and that the Plan Trustee is entitled to judgment in his favor.

I. Statement of Facts and Contentions of the Parties

The material facts that the Court did not resolve in connection with its determinationthat the Debtors were operating a Ponzi scheme at all times material to this proceeding are not in dispute.

The Defendants invested $101,000 between February and October 1999 in what, unbeknownst to them, was a Ponzi scheme. In August 2000, they received a total of $169,600.88 to close out their accounts. The payments represented a return of their $101,000 principal and $68,600.88 in profits.

Because the Court has found that the Debtors were conducting a Ponzi scheme at the time of the investments by and transfers to the Defendants, the profits the Defendants received were actually fictitious in that they were not the result of any legitimate activity. Rather, the source of funds for the transfers was the investments made by other defrauded investors.

Transfers made pursuant to a Ponzi scheme are fraudulent transfers that are recoverable under O.C.G.A. § 18–2–22² because the Debtors made them with the actual intent to defraud creditors. The Court has previously determined that the Plan Trustee cannot recover such transfers to the extent that they represent a return of principal if the transferee received the transfers in good faith.³

In summary, the facts here are that IMA and its affiliates were operating a Ponzi scheme at all material times, that they made fraudulent transfers to the Defendants, and that $68,600.88 of those transfers represented fictitious profits. It is undisputed that the Defendants received the transfers in good faith. Under Georgia law on these facts, the Defendants have received $68,600.88 in fraudulent transfers, the Plan Trustee in accordance with the confirmed plan may avoid them under 11 U.S.C. § 544(b), and the Plan Trustee is entitled to judgment for the amount of the transfers under 11 U.S.C. § 550(a)(1).

The Defendants, however, contend that Louisiana law governs this proceeding and that the applicable period of limitation under Louisiana law expired before the filing of the Chapter 11 petitions that initiated the Debtors' Chapter 11 cases.⁴ The period under Louisiana law expires either one or three years after the date of the transfers. La. Civ.Code § 2041, § 3492. The filing of the Chapter 11 cases occurred on March 16, 2006, well beyond the time when the limitations period expired under Louisiana law, at the latest, in August 2003.

The Defendants advance the following facts in support of their position, which the Plan Trustee does not contest.

Defendants have at all material times resided in Louisiana. In February 1999, the principal of the Debtors, Kirk Wright, made a presentation in Louisiana that Jessie Champagne attended. The Defendants made an initial investment in Louisiana at that time and made later investments by mail or wire transfer to the headquarters office of the Debtors that was then in Manassas, Virginia.

At the time the Defendants closed their account in August 2000, the headquarters office of the Debtors was in Atlanta, Georgia. They submitted their written request for the funds in their account to that office, and the Debtors mailed checks to them in Louisiana. The checks were drawn on the Debtors' bank in Georgia. The Defendants deposited them in their bank in Louisiana.

The Defendants conclude from these facts that most of the activity surrounding their investments and their receipt of funds from their account occurred in Louisiana. Because most of the contacts between the Defendants and the Debtors occurred in Louisiana, they assert, Louisiana law should govern this matter. In this regard, the Defendants invoke the federal choice of law rule, which generally follows the Restatement (Second) of Conflict of Laws, under which the law of the state with the most significant contacts applies. See, e.g., Alvarez–Machain v. United States, 331 F.3d 604, 633 (9th Cir.2003); Medical Mutual of Ohio v. deSoto, 245 F.3d 561, 570 (6th Cir.2001). The Defendants contend that that state is Louisiana.

The Plan Trustee contends that the choice of law rules of the forum state properly govern the choice of law in this proceeding and that, under Georgia's choice of law rules, Georgia law applies. Alternatively, the Plan Trustee asserts that the most significant contacts with regard to this matter occurred in Georgia such that Georgia law also applies under federal choice of law rules.

The choice of law issue effectively governs the disposition of this proceeding. The Plan Trustee is entitled to judgment against the Defendants if Georgia law applies, but the complaint must be dismissed as untimely if Louisiana law applies.

For reasons set forth below, the Court concludes that Georgia's choice of law rules apply and that under those rules the law of the State of Georgia governs this dispute. Accordingly, the Plan Trustee is entitled to judgment against the Defendants in the amount of $68,600.88, representing the fictitious profits they received.

II. Use of Federal or State Choice of Law Rules

The analysis of choice of law issues in a bankruptcy court begins with consideration of whether to apply federal or state choice of law rules. In Klaxon Co. v. Stentor Electric Mfg. Co., 313 U.S. 487, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941), the Supreme Court ruled that a federal court in a diversity action must apply the choice of law rules of the forum state. Such a rule, the Court reasoned, followed from its decision in Erie Railroad v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938), that state law, not federal common law, applies in diversity actions in federal courts.

In Vanston Bondholders Protective Committee v. Green, 329 U.S. 156, 163, 67 S.Ct. 237, 91 L.Ed. 162 (1946), however, the Supreme Court ruled that federal common law governs choice of law issues in bankruptcy cases in connection with “how and what claims shall be allowed under equitable principles.” Vanston is not controlling here because it is distinguishable on its facts. It dealt with issues arising in connection with the allowance of claims in the case, not issues in an action asserting rights to affirmative relief based on state law.

When a civil action in a bankruptcy case involves questions of state law, courts have taken different approaches as to whether the forum state's law or federal common law governs a choice of law issue. Some courts have ruled that a federal interest in national uniformity in the administration of the bankruptcy laws requires application of federal common law to resolve choice of law disputes in accordance with the Vanston principle. E.g., In re Lindsay, 59 F.3d 942, 948 (9th Cir.1995); In re SMEC, Inc., 160 B.R. 86, 89–91 (M.D.Tenn.1993).

The opposite view is that, unless a compelling federal interest dictates otherwise, a bankruptcy court should apply the choice of law rules of the state in which it sits. E.g., Bianco v. Erkins (In re Gaston & Snow), 243 F.3d 599 (2d Cir.2001); Amtech Lighting Servs. Co. v. Payless Cashways, Inc. (In re Payless Cashways), 203 F.3d 1081, 1084 (8th Cir.2000); In re Merritt Dredging Co., 839 F.2d 203, 205–06 (4th Cir.1988).

The latter approach seeks to reconcile the Klaxon and Vanston cases. It recognizes the importance of the Erie principle, applied in Klaxon, that a federal court should not apply federal law to questions whose determination is a matter of state law, while also calling for the use of federal principles when an appropriate federal policy requires them in accordance with the Vanston ruling. The...