Stettner v. Smith (In re IFS Fin. Corp.), 10–20670.
| Decision Date | 27 January 2012 |
| Docket Number | No. 10–20670.,10–20670. |
| Citation | 55 Bankr.Ct.Dec. 276,669 F.3d 255 |
| Parties | In the Matter of IFS FINANCIAL CORPORATION, Debtor.Guillermo De La Pena Stettner; Mario Valverde Garces; Luis De La Pena; Margarita Isabel De La Pena Stettner; Maria Cristina De La Pena; Maria Paz De La Pena, Appellants, v. W. Steve Smith, Trustee, Appellee.In the Matter of IFS Financial Corporation, Debtor.W. Steve Smith, Appellee, v. Guillermo De La Pena Stettner, Appellant.In the Matter of IFS Financial Corporation, Debtor.W. Steve Smith, Appellee, v. Mario Valverde Garces, Appellant.In the Matter of IFS Financial Corporation, Debtor.W. Steve Smith, Trustee, Appellee. v. Luis De La Pena; Margarita Isabel De La Pena Stettner; Maria Cristina De La Pena; Maria Paz De La Pena, Appellants. |
| Court | U.S. Court of Appeals — Fifth Circuit |
OPINION TEXT STARTS HERE
Michael Gene Colvard (argued), Martin & Drought, P.C., San Antonio, TX, for appellants.
Blanche D. Smith (argued), W. Steve Smith (argued), McFall, Breitbeil & Shults, P.C., Houston, TX, for appellee.
Appeal from the United States District Court for the Southern District of Texas.
Before GARZA, CLEMENT and SOUTHWICK, Circuit Judges.
In this bankruptcy appeal, Guillermo de la Pena Stettner, Mario Valverde Garces, Luis de la Pena, Margarita Isabel de la Pena Stettner, Maria Cristina de la Pena, and Maria Paz de la Pena (together, “Appellants”) appeal the district court's affirmance of the bankruptcy court judgment of over $3 million in favor of Appellee W. Steve Smith (“Smith”), trustee of IFS Financial Corporation's (“IFS”) estate. Their appeal centers on the district court's finding that IFS fraudulently transferred funds to the Appellants. We AFFIRM.
IFS and seventeen affiliated organizations (together with IFS, “Interamericas”) were debtors in a series of Chapter 7 cases. This appeal arises from eight collective adversary proceedings, which Smith as trustee brought against the Appellants for avoidance of fraudulent transfers under Chapter 5 of the Bankruptcy Code and Chapter 24 of the Texas Business and Commerce Code.
Interamericas, based in The Woodlands, Texas, extended its operations internationally in the insurance, mortgage, and banking services industries. Many Interamericas entities did no more than temporarily stow stock in other Interamericas companies, among which were offshore shell companies created solely to channel money between investors and actively operating Interamericas organizations. Interamericas' activities centered on IFS. At Interamericas' helm was the Pimienta family.
Hugo Pimienta led Interamericas and acted as the primary decision maker for many Interamericas entities in the United States. Along with his father, he exercised power of attorney over several Interamericas entities abroad. Even though the different Interamericas companies had separate corporate structures, a single advisory board based in The Woodlands—also dominated by the Pimienta family—oversaw all Interamericas operations and gave orders to Interamericas officers and managers. The advisory board set interest rates, managed investments, transferred money between Interamericas enterprises, and personally handled the sale of assets. No company in Interamericas' network operated independently of this board. When the board was not meeting, it entrusted its full authority to Hugo Pimienta.
Interamericas' investors were predominantly Mexican citizens. They reportedly deposited their contributions into one of three bank accounts in Texas: (1) account no. 137456 in the name of “Integra Bank” at Southwest Bank of Texas; (2) account no. 325716 in the name of “INV Capital” at Southwest Bank of Texas; and (3) account no. 91538 also in the name of “INV Capital” at Woodforest National Bank. The Integra and INV accounts served as the primary stream of funds into Interamericas; these accounts received over $270 million in funds from investors between December 1999 and October 2001. Other Interamericas entities also deposited over $163 million in funds in the same accounts during that period. Although investors were told that their deposits took some distinct, individualized form—such as a certificate of deposit, money market account, or bearer note—in reality, the Integra and INV accounts pooled all investor funds.
To track investments in the different Interamericas companies placed in these accounts, Interamericas used a software program known as the Portia system. The system generated statements for investors that listed supposed investment activity, interest rates, maturity dates, and deposits and withdrawals. Interamericas Business Services, another Interamericas company, provided administrative services for the system's users. Investors apparently believed that their funds were held in a bank by the name of Integra, rather than in an account under the name “Integra Bank” located in Texas.
The organization named Integra Bank did in fact exist. Although operating out of a physical structure in Curaçao, where it was incorporated, Integra Bank lacked tellers and had little interaction with depositors. Integra Bank was independent from Interamericas only on paper. It is unclear what actual function Integra Bank provided. IFS promoters1 forwarded checks from investors to IFS offices in The Woodlands, Texas, rather than to Integra Bank, for deposit into one of Interamericas' three accounts. When investors wanted to remove funds, they contacted IFS—not Integra Bank. Hugo Pimienta or other advisory board members approved all withdrawals. No one at Integra Bank had the independent authority to withdraw funds from the account held in its name.
A series of events from 1997 to 2002 led to Interamericas' downfall, leaving IFS its only functional entity. First, in late 1997, a failed merger led to philosophical differences between Hugo Pimienta and a group of investors from a non-Interamericas company, GCM Corporation Limited (“GCM”). GCM withdrew from its relationship with Interamericas and agreed to accept a $50 million note from another Interamericas company, Interamericas Financial Holdings Corporation (“IFH”). IFH soon defaulted on this note, however, and GCM sued to enforce their agreement. IFS, IFH, and GCM reached a compromise in May 2000: IFS replaced IFH as the note's obligor, and Blitz Holdings Corporation, another non-Interamericas company, replaced GCM as the note's payee. IFS restructured its debt, and GCM's note increased to $70 million in value. Over the next year, IFS paid Blitz $30 to $40 million out of the Integra account before ultimately defaulting. Blitz brought a series of lawsuits against IFS to recover the note's balance.
Over the course of Blitz's litigation, all evidence suggests that the Interamericas companies were not operating as a financially stable or ethically sound enterprise. During that time, the advisory board removed funds belonging to IFS and Interamericas subsidiaries from the Integra account and began loaning millions to IFS shareholders and insiders, including the Appellants. As IFS defaulted on obligations to GCM and Blitz, American Founders Life Insurance Company (“AFL”), an alleged fully-owned subsidiary of IFS, funneled approximately $40 million to IFS investors in the form of “Select Asset Loans,” which were loans in name only; the money actually went to IFS. These loans served the purpose of streaming cash out of AFL and into IFS while buoying AFL's balance sheet with the appearance of obligations from creditworthy investments. In late 1999, IFS sold AFL in exchange for $49.5 million and 50,000 shares of stock in another Interamericas entity. In November 1999, IFS also negotiated the sale of Accubanc Mortgage, another allegedly fully-owned subsidiary of IFS, for $30 to $40 million. Most proceeds from the sales of AFL and Accubanc went through holding companies into the Integra account in Texas. By 2002, the advisory board had sold off most of Interamericas. Only IFS remained afloat.
IFS filed for bankruptcy in 2002. The bankruptcy court appointed Smith to represent the IFS estate as its trustee. Smith filed over a hundred separate adversary proceedings, including eight adversary proceedings against the Appellants, which the bankruptcy court consolidated. In the consolidated proceedings against Appellants, Smith sought to avoid $3 million in transfers IFS made to the Appellants in Interamericas' final years. Invoking Texas law through the federal bankruptcy code, see 11 U.S.C. § 544; Tex. Bus. & Com.Code Ann. § 24.005, Smith claimed fraud, aiding and abetting fraudulent transfers, and conspiracy. The bankruptcy court disallowed any claims based on veil-piercing or earmarking theories.
After a series of overlapping trials and summary judgment motions, the bankruptcy court issued a final opinion in September 2009. That court found that the evidence supported trustee's claims of fraudulent transfer against the Appellants and summarized its principal findings:
• The funds were paid out of an account legally titled in the name “Integra Bank,” but actually owned and controlled by the Interamericas Companies.
• IFS, acting through its officers and agents, exercised exclusive control over the account.
• The funds were paid on account of antecedent debt but in furtherance of a fraudulent scheme.
• The [Appellants] knew or should have known of the fraudulent scheme.
In re IFS Fin. Corp., 417 B.R. at 427.
Specifically, the bankruptcy court found that transfers to the Appellants were fraudulent and awarded judgments totaling $3,131,315.20 against the Appellants. The Appellants appealed the bankruptcy court's judgment to the district court. The district court affirmed. The Appellants now seek our review of the district court's judgment.
Appellants raise two issues for our review: (1) whether the district court erred in determining that IFS was the de facto owner of three bank accounts through which its allegedly fraudulent transfers passed; and (2) irrespective of...
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