perkins v. haines - bronner answer brief

8/3/2019 Perkins v. Haines - Bronner Answer Brief

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UNITED STATES COURT OF APPEALSFOR THE ELEVENTH CIRCUIT

NO. 10-10683-BB

WILLIAM F. PERKINS, PLAN TRUSTEE FOR INTERNATIONALMANAGEMENT ASSOCIATES, LLC

Appellant,

v.

AENA Y. HAINES, ET AL

Appellees

ON DIRECT APPEAL FROM THE UNITED STATES BANKRUPTCY COURTFOR THE NORTHERN DISTRICT OF GEORGIA, ATLANTA DIVISION

RESPONSE BRIEF OF JAMES BRONNER, NATHANIEL BRONNER ANDSIMONE BRONNER

Robert J. MotternGeorgia Bar No. 526795

Investment Law Group of Gillett,Mottern & Walker, LLP

1230 Peachtree Street, N.E., Suite 2445

Atlanta, Georgia 30309Tel: 404-607-6933Fax: 678-840-2126

Case: 10-10683 Date Filed: 07/01/2010 Page: 1 of 21


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CERTIFICATE OF INTERESTED PERSONS AND CORPORATEDISCLOSURE STATEMENT

Appellees James Bronner, Nathaniel Bronner and Simone Bronner hereby

incorporate by reference the Certificate of Interested Persons filed by the

Appellant.



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STATEMENT REGARDING ORAL ARGUMENTAppellees James Bronner, Nathaniel Bronner and Simone Bronner do not

believe that oral argument is necessary or will materially aid the Court's decision of

this appeal.



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TABLE OF CONTENTS

CERTIFICATE OF INTERESTED PERSONS AND CORPORATEDISCLOSURE STATEMENT .................................................................................. 2

STATEMENT REGARDING ORAL ARGUMENT ............................................... 3

TABLE OF CONTENTS ........................................................................................... 4

TABLE OF CITATIONS .......................................................................................... 5

STATEMENT OF THE ISSUES............................................................................... 6

SUMMARY OF THE ARGUMENT ........................................................................ 7

ARGUMENT AND CITATIONS OF AUTHORITY .............................................. 9

A. DEFRAUDED EQUITY INVESTORS HAVE A CLAIM AT THE TIMEOF INVESTMENT................................................................................................. 9

B. PAYMENTS THAT ONLY DEFRAUD EQUITY INVESTORS MAYNOT BE RECOVERED AS FRAUDULENT TRANSFERS .............................11

1. If Equity Investors Are Not Creditors, Then No Creditor Was DefraudedBy Payments To Equity Investors .....................................................................12

2. If Equity Investors Are Not Creditors, Then The Debtors Were NotInsolvent ............................................................................................................14

CONCLUSION ........................................................................................................15

CERTIFICATE OF COMPLIANCE .......................................................................18

CERTIFICATE OF SERVICE ................................................................................19



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TABLE OF CITATIONSCases

AFI Holding, Inc., 525 F.3d 700 (9th Cir. 2008) ....................................................... 9

Bauman v. Bliese, et al. (In re McCarn 's Allstate Fin., Inc.), 326 B.R. 843, 850

(Bankr. M.D. Fla. 2005) .......................................................................................13

In re Bayou Group, LLC, 362 B.R. 624 (Bankr.S.D.N.Y. 2007) ............................13

In re Terry Manufacturing Company, Inc., 2007 WL 274319 (Bankr.M.D.Ala.2007) ....................................................................................................................... 9

Jobin v. Lalan (In re M & L Business Machine Co., Inc.), 160 B.R. 851, 857

(Bankr. D. Colo. 1993), aff'd,167 B.R. 219 (1994) .............................................13

Quilling v. Stark, 2006 U.S. Dist. LEXIS 40672, 2006 WL 1683442, at 6 (N.D. Tex.

June 19, 2006) ......................................................................................................13

Rieser v. Hayslip, et al. (In re Canyon Sys. Corp.), 343 B.R. 615, 636-37 (Bankr.

S.D. Ohio 2006) ....................................................................................................13

Terry v. June, 432 F. Supp. 2d 635, 639 (W.D. Va. 2006) ......................................13

Statutes

11 U.S.C. 101(10) ................................................................................................... 9

11 U.S.C. 101(5) ..................................................................................................... 9

11 U.S.C. 548 ................................................................................................ passim

11 U.S.C. 548(a) ........................................................................................... passim

11 U.S.C. 548(c) ...................................................................................................16

O.C.G.A. 18-2-70, et seq. ......................................................................................10

O.C.G.A. 18-2-71(3) ..............................................................................................11

O.C.G.A. 18-2-78(a) ..............................................................................................10



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STATEMENT OF THE ISSUES1) Whether an equity investor in an enterprise which is later revealed to

be a fraudulent scheme (i.e., a ponzi scheme) has a claim against the

fraudulent enterprise at the time of the investment, which claim is

satisfied by any payments subsequently received from the fraudulent

enterprise up to the amount of the original investment.

2) If equity investors in an enterprise which is later revealed to be afraudulent scheme do not have claims against the fraudulent enterprise

at the time of their investment, whether any payments made to equity

investors prior to the collapse of the fraudulent enterprise that only

serve to defraud other equity investors and not general creditors of the

enterprise may be recovered as fraudulent transfers.

3) If equity investors in an enterprise which is later revealed to be afraudulent scheme do not have claims against the fraudulent enterprise

at the time of their investment, whether the investments made by

equity investors can be treated as liabilities for purposes of

determining whether the enterprise was insolvent at the time any

payments were made to such equity investors.



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SUMMARY OF THE ARGUMENTThis case concerns a series of lawsuits filed by the Trustee to recover

payments made to equity investors in the Debtors prior to the collapse of the

Debtors fraudulent enterprise. Most, if not all, of the equity investors have

asserted a defense that the payments to them are not recoverable because they were

received in good faith, without knowledge of the fraud, and for value, with the

value being the satisfaction of their latent claim for rescission based on the

Debtors fraud. The Trustee contends that the defense is not applicable on the

grounds that a latent claim, unknown to the claimant at the time of receipt of the

payment, does not qualify as a claim for purposes of the defense.

The Bronners contend that a claim is defined under the Bankruptcy Code

and the Georgia Uniform Transfer Act in the broadest way possible, such that

knowledge is not a requirement, and that this Court may not read a knowledge

requirement into the definition where the applicable legislatures did not chose to

add one explicitly.

The Trustees argument for recovery of payments is also based on the

circular and inconsistent argument that equity investors were creditors for some

purposes but not for others, despite the fact the applicable statutory definitions do

not permit such an inconsistent use of the term. For example, the Trustee argues

that equity investors are not creditors for purposes of any payments they might



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have received, but are creditors for purposes of determining whether the Debtors

were and are insolvent at the time of the payment and for purposes of determining

whether any creditors were defrauded by the payments.

Contrary to the Trustees characterization of the Debtors as businesses with

little or no net worth, the Debtors were quite solvent, as the Trustee recovered over

ten times more in assets than debts to general creditors (i.e., excluding claims of

equity investors based on their equity investment). The Trustees plan provided

for subordination of equity investors claims and full payment of non-equity

investor creditors, who have presumably long since been paid in full. Thus, the

fraudulent transfer laws are being used not to effect a more equitable distribution

of the assets of the Debtors among creditors, but to effect a redistribution of assets

among equity investors only. That is not the intent and purpose of the fraudulent

transfer laws, and therefore the Trustees claims should be denied entirely.



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ARGUMENT AND CITATIONS OF AUTHORITYA. DEFRAUDED EQUITY INVESTORS HAVE A CLAIM AT THE TIME

OF INVESTMENT

The vast majority of courts have held that an investor who receives payment

from a ponzi scheme gives value up to the amount of the principal invested by the

investor, based on the fact that the payment satisfies a fraud or rescission claim that

the investor would have absent receipt of the payment. See, e.g,AFI Holding, Inc.,

525 F.3d 700 (9th Cir. 2008). The Trustee can cite only one case which did not

follow this line of reasoning. In re Terry Manufacturing Company, Inc., 2007 WL

274319 (Bankr.M.D.Ala. 2007). The Bronners submit thatAFI Holding, Inc., and

the numerous cases holding likewise, are well reasoned and should be followed by

this Court.

The Bronners dispute the Trustees argument that they do not hold claims

against the Debtors estates based on the amount they invested in the Debtors

ponzi scheme. The term creditor means any entity that has a claim. 11 U.S.C.

101(10). 11 U.S.C. 101(5) defines a claim in the broadest possible sense, as

follows:

(5) The term "claim" means

(A) right to payment, whether or not such right is reduced to

judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured,

disputed, undisputed, legal, equitable, secured, or unsecured; or



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(B) right to an equitable remedy for breach of performance if such

breach gives rise to a right to payment, whether or not such right to an

equitable remedy is reduced to judgment, fixed, contingent, matured,

unmatured, disputed, undisputed, secured, or unsecured.

Importantly, the Bankruptcy Code does not say that an entity must have

knowledge that it has a claim in order to be considered a creditor. The definitions

for creditor and claim are two of the most central definitions in the entire

Bankruptcy Code. This Court should not rewrite the definitions by adding a

knowledge requirement to the definitions of creditor and claim as suggested by

the Trustee, because that is more properly the function of Congress and would

throw more than a century of bankruptcy precedent into doubt.

The Trustee also seeks to recover fraudulent transfers under the Uniform

Fraudulent Transfer Act as passed in the State of Georgia, O.C.G.A. 18-2-70, et

seq. (the Georgia Fraudulent Transfer Act). The Georgia Fraudulent Transfer

Act also provides a defense to any payee who received an alleged fraudulent

transfer in good faith and for reasonably equivalent value. See O.C.G.A. 18-2-

78(a). And, the Georgia Fraudulent Transfer Act also defines a claim in a

manner similar to the way claim is defined under the Bankruptcy Code:

"Claim" means a right to payment, whether or not the right is reduced

to judgment, liquidated, unliquidated, fixed, contingent, matured,



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unmatured, disputed, undisputed, legal, equitable, secured, or unsecured.

O.C.G.A. 18-2-71(3).

In particular, as under the Bankruptcy Code, knowledge of a claim is not

necessary for a person to hold a claim.

Therefore, under the current definitions of claim under both the

Bankruptcy Code, and the Georgia Uniform Fraudulent Transfer Act, equity

investors in the fraudulent enterprise at issue in this case had a claim against the

enterprise for fraud and rescission at the time they invested, notwithstanding their

lack of notice of such claims at the time of their investment or the time of receipt

of payments from the scheme. Accordingly, all such investors who received

payments from the scheme gave value to the scheme in the form of satisfaction of

their claims, at least up to the amount of their investment.

B. PAYMENTS THAT ONLY DEFRAUD EQUITY INVESTORS MAYNOT BE RECOVERED AS FRAUDULENT TRANSFERS

A holding that investors in the Debtors ponzi scheme were not creditors on

the date they invested would render the Trustee unable to prove the basic elements

of a fraudulent transfer to the investors under either the actual fraud provisions of

11 U.S.C. 548(a)(1)(A) or the constructive fraud provisions of 11 U.S.C.

548(a)(1)(B).1

1 While the discussion herein is of federal fraudulent transfer provisions found in11 U.S.C. 548, the analysis also applies to claims brought by the Trustee under



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1. If Equity Investors Are Not Creditors, Then No Creditor Was DefraudedBy Payments To Equity Investors

If equity investors in a fraudulent enterprise are not creditors until the

fraudulent scheme is revealed, then any payments made to equity investors prior to

the collapse of the fraudulent enterprise that only serve to defraud other equity

investors and not general creditors of the enterprise may not be recovered as

fraudulent transfers.

The actual fraud cause of action under 11 U.S.C. 548(a)(1)(A) provides

that a fraudulent transfer occurs when a transfer is made with actual intent to

hinder, delay, or defraud any entity to which the debtor was or became, on or after

the date that such transfer was made or such obligation was incurred, indebted.

As many courts have recognized, the parties who are generally defrauded by

payments made by a ponzi scheme to its investors are not general creditors but

rather existing investors (who are defrauded by the existence of the payments into

making additional investments in the ponzi scheme) or future investors (who were

defrauded by the existence of the payments into making an original investment in

the Georgia Uniform Fraudulent Transfer Act because the legal standard forrecovery is essentially the same in all material respects.



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the ponzi scheme). See, e.g., In re Bayou Group, LLC, 362 B.R. 624

(Bankr.S.D.N.Y. 2007).2

In this case, the only parties who were defrauded by the Debtors payments

to equity investors were other equity investors in the same scheme because, in the

end, the liquidation of the Debtors assets resulted in proceeds that were over ten

times the amount of non-investor claims against their estates. In particular,

Schedule DS-7 to the Trustees Disclosure Statement indicates that the Debtors

only had about $800,000 of non-investor claims. Response of Nathaniel and

Simone Bronner to Trustees Motion for Partial Summary Judgment (Bronner

Response), Page 10. However, Schedule DS-5 to the Trustees Disclosure

Statement reflects that the Trustee had realized $8,513,218.25 from the liquidation

2

Quilling v. Stark, 2006 U.S. Dist. LEXIS 40672, 2006 WL 1683442, at 6 (N.D.Tex. June 19, 2006) ("The existence of a Ponzi scheme as alleged in the complaintmakes the transfer of investor funds fraudulent as a matter of law."(citationomitted)) (emphasis in original); Terry v. June, 432 F. Supp. 2d 635, 639 (W.D.Va. 2006) ("[C]ourts have widely found that Ponzi scheme operators necessarilyact with actual intent to defraud creditors due to the very nature of theirschemes.");Jobin v. Lalan (In re M & L Business Machine Co., Inc.), 160 B.R.851, 857 (Bankr. D. Colo. 1993), aff'd,167 B.R. 219 (1994) ("[I]n a Ponzi schemethe only inference that a court can make is that the Debtor had the requisite intentto hinder, delay or defraud under 548(a)(1)."). See also, Bauman v. Bliese, et al.

(In re McCarn 's Allstate Fin., Inc.), 326 B.R. 843, 850 (Bankr. M.D. Fla. 2005)("Bankruptcy courts nationwide have recognized that establishing the existence ofa Ponzi scheme is sufficient to prove a Debtor's actual intent to defraud.");Rieserv. Hayslip, et al. (In re Canyon Sys. Corp.), 343 B.R. 615, 636-37 (Bankr. S.D.

Ohio 2006) (holding that "[a]ctual intent to hinder, delay or defraud may beestablished as a matter of law in cases in which the debtor runs a Ponzi scheme or asimilar illegitimate enterprise").



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of the Debtors assets, an amount that is over ten times the amount of non-investor

claims against the Debtors. Bronner Response, Page 8. Furthermore, the Trustees

plan subordinates any claim by equity investors and provides for full payment of

non-investor claims.

11 U.S.C. 548 (and the comparable provision of the Georgia Uniform

Fraudulent Transfer Act) only authorizes the Trustee to recover payments that

serve to hinder, delay or defraud creditors. If Court adopts the Trustees

argument that the equity investors who invested in the Debtors ponzi scheme are

not creditors, then no actual fraud occurred in any of the Debtors payments to

investors since all of the available evidence indicates that the Debtors estates were

grossly solvent at all times.

2. If Equity Investors Are Not Creditors, Then The Debtors Were NotInsolvent

The constructive fraud cause of action under 11 U.S.C. 548(a)(1)(B)

provides that a fraudulent transfer exists if the debtor makes a transfer for less

than reasonably equivalent value and was insolvent or became insolvent as part as

a result of the transfer. If equity investors in the Debtors ponzi scheme are

creditors to the extent of the amount of their principal invested in the scheme, then

distributions to the equity investors up to the amount of principal they invested

gave the Debtors received reasonably equivalent value by the satisfaction of their

tort/rescission claims. However, if such equity investors are not creditors to the



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extent of the amount of their principal invested in the scheme, then the Debtors

may not have received reasonably equivalent value for the transfers, but no claim

would exist for constructive fraud because the Debtors were insolvent only by

virtue of the tort/rescission claims of those equity investors.

In this case, Schedule DS-7 indicates that the Debtors only had about

$800,000 of non-investor claims. Bronner Response, Page 10. However, Schedule

DS-5 to the Trustees Disclosure Statement reflects that the Trustee had realized

$8,513,218.25 from the liquidation of the Debtors assets, an amount that is over

ten times the amount of non-investor claims against the Debtors. Bronner

Response, Page 8. Indeed, the Trustees plan subordinates any claim by investors

and provides for full payment of non-investor claims.

If the equity investors in the Debtors ponzi scheme were not bona fide

creditors at the time they received made their investments and received payments

thereon, then the evidence clearly indicates that the Debtors were not insolvent

then (or now), and thus no fraudulent transfers occurred as defined in 11 U.S.C.

548(a)(1)(B).

CONCLUSIONThe Trustees analysis would require that the Court adopt circular, illogical

and inconsistent definitions of the term claim and creditor. The Trustee

believes that all equity investors have claims for the amount they invested in the



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Debtors ponzi scheme for purposes of determining whether the Debtors were

insolvent under 11 U.S.C. 548(a)(1)(B), but not for purposes of determining

whether value was given in conjunction with the investors good faith defense

under 11 U.S.C. 548(c). Similarly, the Trustee believes that all investors have

claims for the amount they invested in the Debtors ponzi scheme for purposes of

determining whether the Debtors payments to equity investors defrauded

creditors under 11 U.S.C. 548(a)(1)(A), but not for purposes of determining

whether value was given in conjunction with the investors good faith defense

under 11 U.S.C. 548(c). To date, no court which has thoroughly analyzed the

issues has followed the Trustees tortured reasoning, and this Court should not

either. If investors have a claim for one purpose, then they should have a claim for

all purposes, unless and until Congress (and the Georgia Legislature) specifies

otherwise with a proper amendment to the relevant Bankruptcy Code (and Georgia

Uniform Fraudulent Transfer Act) sections.

_________________________Robert J. MotternGeorgia Bar No. 526795Investment Law Group of Gillett,

Mottern & Walker, LLP1230 Peachtree Street, N.E., Suite 2445Atlanta, Georgia 30309Tel: 404-607-6933Fax: 678-840-2126



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Attorney for James Bronner, NathanielBronner and Simone Bronner



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CERTIFICATE OF COMPLIANCE

I certify that this brief complies with the type-volume limitation set forth in

Fed.R.App.P. 32(a)(7)(B) because this brief contains 1,574 words, excluding parts

of the brief exempted by Fed.R.App.P. 32(a)(7)(B)(iii).

_________________________Robert J. MotternGeorgia Bar No. 526795Investment Law Group of Gillett,Mottern & Walker, LLP1230 Peachtree Street, N.E., Suite 2445Atlanta, Georgia 30309Tel: 404-607-6933Fax: 678-840-2126

Attorney for James Bronner, Nathaniel

Bronner and Simone Bronner



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CERTIFICATE OF SERVICE

I hereby certify that on the 1st day of July, 2010, I caused to be served a true

and correct copy of the foregoing RESPONSE BRIEF OF APPELLEES JAMES

BRONNER, NATHANIEL BRONNER AND SIMONE BRONNER and

accompanying appendix via First Class US Mail postage prepaid on the parties

listed on the exhibit attached hereto.

_________________________Robert J. MotternGeorgia Bar No. 526795Investment Law Group of Gillett,Mottern & Walker, LLP1230 Peachtree Street, N.E., Suite 2445Atlanta, Georgia 30309Tel: 404-607-6933

Fax: 678-840-2126

Attorney for James Bronner, NathanielBronner and Simone Bronner



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SERVICE LIST

Greg T. BaileyAttorney at Law571 Culberson StreetAtlanta, GA 30310

Joshua S. BarlowLee HarringtonJonathan SabloneTimothy W. MungovanNixon Peabody100 Summer StreetBoston, MA 02110-2106

Bryan Eugene BatesMark S. KaufmanMcKenna Long Aldridge3030 Peachtree St. NE

#5300Atlanta, GA 30308

Colin BernardinoKilpatrick Stockton1100 Peachtree St. NE#2800

Atlanta, GA 30309

Heather D. BrownKitchens Kelly Gaynes, P.C.3495 Piedmont Rd. NE STE 11-900Atlanta, GA 30305-1755

Thomas M. ByrneSutherland, Asbill & Brennan999 W. Peachtree St. NWAtlanta, GA 30309-3819

Jonathan H. FainJonathan H. Fain & Associates, PC66 Lenox PointeAtlanta, GA 30324

James K. Knight Jr.Attorney of Law401 Atlanta StreetMarietta, GA 30060

William R. LesterFryer, Shuster & Lester, P.C.1050 Crown Pointe Parkway, Suite 410Atlanta, GA 30338

Sharon M. LewonskiEpstein Becker & Green, PC945 East Paces Ferry Road, Suite 2700Atlanta, GA 30326

Christopher Dubree PhillipsLamberth, Cifelli, Stokes & Stout, P.A.3343 Peachtree Rd. NE STE 550Atlanta, GA 30326-1428

Sblend A. SblendorioCatosha L. WoodsHoge Fenton Jones & Appel6155 Stoneridge Dr.Pleasanton, CA 94588



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Paul M. SpizzirriSpizzirri Law Offices1170 Peachtree Street NESuite 1200Atlanta, GA 30309

Kevin A. StineBaker, Donelson, Bearman, Caldwell &Berkowitz, PC3414 Peachtree Rd. NEAtlanta, GA 30326-1153


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