perkins v. haines - answer brief
TRANSCRIPT
8/3/2019 Perkins v. Haines - Answer Brief
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No. 10-10683-BB
UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT _______________________
WILLIAMS F. PERKINS, PLAN TRUSTEE FOR INTERNATIONAL MANAGEMENT
ASSOCIATES, LLCPlaintiff-Appellant,
v.
ANEA Y. HAINES, ET AL.
Defendants-Appellees.
_______________________
On Appeal from the United States Bankruptcy Court for the Northern District of Georgia, No. 06-62966-PWB (The Honorable Paul W. Bonapfel, District Judge)
_______________________
BRIEF OF DEFENDANTS-APPELLEES GEORGE R. CURTIS, SR. LIVING TRUST, GEORGE R. CURTIS, SR., BETTY CURTIS, DAVID LAIRD FAMILY TRUST, DAVID
LAIRD, DEBORAH H. LAIRD, KEITH O. BURKS, JAMES H. SHELTON, JAMESSHELTON, III, CORNELL SHELTON,TBC CAPITAL INC., X-SPURTS INVESTMENT
CLUB OF ATLANTA, LLC, JOHN L. CARTER, DEXTER M. PAGE, WILLIAM L.
HUTCHINSON, JR., RICARDO A. ARZU, PHILLIP E. HADLEY, ERICH G. RANDOLPH, LAVERNE HAMILTON-JONES, MARTIN D. JEFFRIES, MARCO D. COLEMAN, DAVID WISNESKI, MICHELE F. WISNESKI, LAWRENCE HOOPER,
GREGORY HOOPER, ATLANTA PERINATAL ASSOCIATES, P.C., SYRETHAANDREWS, ALICIA DORSEY, CAROL GRONE, BRADFORD BOOTSTAYLOR, WILLIE
J. CLAY, RAYSHAWN F. CLAY, CARTOPIA, LLC, DECKO QUALITY SERVICES, LLC, CLAY REAL ESTATE HOLDINGS, INC., ANNETTE K. BOND, MT. NEBO
BAPTIST LIFE CENTER, INC. AND VALERIE PEOPLES _______________________
TIMOTHY W. MUNGOVAN
NIXON PEABODY LLP100 SUMMER STREET BOSTON, MASSACHUSETTS 02110PH. 617-345-1000; FAX 617-345-1300FOR GEORGE RUSSELL CURTIS, SR. LIVING TRUST , GEORGE RUSSELL CURTIS, SR., BETTY CURTIS, DAVID LAIRD FAMILY TRUST, DAVIDLAIRD, AND DEBORAH H. LAIRD July 1, 2010
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TIMOTHY W. MUNGOVAN (MASS. BAR
# 600702)JONATHAN SABLONE (MASS. BAR #
632998)LEE HARRINGTON (MASS. BAR #
643239)JOSHUA BARLOW (MASS. BAR #
667472)NIXON PEABODY LLP100 SUMMER STREET BOSTON, MA 02110617.345.1000
THOMAS M. BYRNE (GA. BAR # 101350)ANGELA R. FOX (GA. BAR # 131077)SUTHERLAND ASBILL & BRENNAN
LLP999 PEACHTREE STREET, NEATLANTA, GEORGIA 30309-3996404.853.8000
ATTORNEYS FOR DEFENDANTS –
APPELLEES KEITH O. BURKS, JAMES H. SHELTON, JAMES SHELTON, III, CORNELL
SHELTON AND TBC CAPITAL INC.
ATTORNEYS FOR DEFENDANTS –
APPELLEES GEORGE RUSSELL CURTIS, SR. LIVING TRUST, GEORGE RUSSELL
CURTIS, SR. AND BETTY CURTIS
ATTORNEYS FOR DEFENDANTS –
APPELLEES DAVID LAIRD FAMILY
TRUST, DAVID LAIRD, AND DEBORAH
H. LAIRD
JONATHAN H. FAIN, ESQ. (GA. BAR #
254114)JONATHAN H. FAIN & ASSOC., PC66 LENOX POINTE ATLANTA, GEORGIA 30324404.968.2600
ATTORNEYS FOR DEFENDANTS –
APPELLEES X-SPURTS INVESTMENT
CLUB OF ATLANTA, LLC, JOHN L. CARTER, DEXTER M. PAGE, WILLIAM L. HUTCHINSON, JR., RICARDO A. ARZU
AND PHILLIP E. HADLEY
KEVIN A. STINE (GA. BAR # 682588)
JOSHUA TROPPER (GA. BAR # 716790)BAKER, DONELSON, BEARMAN, CALDWELL & BERKOWITZ, PCSUITE 1600, MONARCH PLAZA 3414 PEACHTREE ROAD, N.E.ATLANTA, GA 30326404.577.6000
ATTORNEYS FOR DEFENDANTS –
APPELLEES ERICH G. RANDOLPH AND
LAVERNE HAMILTON-JONES
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HEATHER D. BROWN (GA. BAR #
100169)MARK A. KELLEY (GA. BAR # 412325)KITCHENS KELLEY GAYNES, PCELEVEN PIEDMONT CENTER, SUITE 9003495 PIEDMONT ROAD, N.E.ATLANTA, GA 30305404.237.4100
ATTORNEYS FOR DEFENDANT –
APPELLEE MARTIN D. JEFFRIES
SHARON M. LEWONSKI (GA. BAR #
451818)EPSTEIN BECKER & GREEN, P.C.945 EAST PACES FERRY RD., SUITE 2700ATLANTA, GA 30326-13805404.923.9000
ATTORNEYS FOR DEFENDANT – APPELLEE
MARCO D. COLEMAN
CHRISTOPHER D. PHILLIPS (GA. BAR #
575913)LAMBERTH, CIFELLI, STOKES,ELLIS & NASON, P.A.3343 PEACHTREE ROAD, N.E.EAST TOWER, SUITE 550ATLANTA, GA 30326-1022
ATTORNEYS FOR DEFENDANTS –
APPELLEES DAVID WISNESKI AND
MICHELE FRANCINE WISNESKI
SBLEND A. SBLENDORIO (CA. BAR #
109903)
CATOSHA L. WOODS (CA. BAR # 228640)
HOGE, FENTON, JONES & APPEL, INC.4309 HACIENDA DRIVE, SUITE 350PLEASANTON, CA 94588TELEPHONE: 925.460.3365
ATTORNEYS FOR DEFENDANTS –
APPELLEES LAWRENCE HOOPER AND
GREGORY HOOPER
ADMITTED P RO H AC V ICE
WILLIAM R. LESTER (GA. BAR #
447725)SEGAL, FRYER, SHUSTER &
LESTER, P.C.1050 CROWN POINTE PKWY., SUITE 410ATLANTA, GA 3033877.668.9300
ATTORNEYS FOR DEFENDANTS –
APPELLEES ATLANTA PERINATAL
ASSOCIATES, P.C., SYRETHA
ANDREWS, ALICIA DORSEY, CAROL
GRONE, DEXTER M. PAGE AND
BRADFORD BOOTSTAYLOR
PAUL M. SPIZZIRRI (GA. BAR # 672752)SPIZZIRRI LAW OFFICESMIDTOWN PROSCENIUM CENTER, 1170 PEACHTREE STREET N.E., SUITE 1200ATLANTA, GA 30309800.714.7471
ATTORNEYS FOR DEFENDANTS –
APPELLEES WILLIE J. CLAY, RAYSHAWN
FRANCIS CLAY, CARTOPIA, LLC, DECKO
QUALITY SERVICES, LLC, AND CLAY
REAL ESTATE HOLDINGS, INC.
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JAMES K. KNIGHT, JR. (GA. BAR #
425750)401 ATLANTA STREET MARIETTA, GA 30060770.428.5250
ATTORNEY FOR DEFENDANT –
APPELLEE ANNETTE K. BOND
GREGORY T. BAILEY (GA. BAR # 032075)571 CULBERSON STREET
ATLANTA, GA 30310
404.397.1975
ATTORNEY FOR DEFENDANT – APPELLEE
MT. NEBO BAPTIST LIFE CENTER, INC.
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CERTIFICATE OF INTERESTED PERSONS AND
CORPORATE DISCLOSURE STATEMENT
Abdur-Rabbani, Ibrahim
Adams, Edwana
Anand, Esq., Justin
Anderson, Ivy
Andrews, Syretha
Atlanta Perinatal Associates, P.C.
Atlanta Verve, LLC
Atwater, Stephen
Arzu, Ricardo A.
Bailey, Erroll J.
Bailey, Esq., Gregory T.
Baker, Scott G.
Baker, Donelson, Bearman, Caldwell & Berkowitz, P.C.
Barlow, Esq., Joshua S.
Barrett, Thomas
Bates, Esq. Bryan E., counsel to Committee of Investors formed pursuant to Plan
of Reorganization
Bernardino, Esq., Colin M., counsel to William F. Perkins, Plan Trustee
Bishop, Blaine E., member of Committee of Investors formed pursuant to Plan of
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Reorganization
Bishop, J. Michael
Bonapfel, Judge Paul W., Bankruptcy Judge
Bond, Annette K.
Bootstaylor, Bradford
Bradylyons, Esq., Morgan
Braxton, James
Broadfoot, Esq., Herbert C.
Bronner, James
Bronner, Nathaniel
Bronner, Simone
Brossard, Mario & Charisse
Brown, Esq., Heather D.
Brumbaugh, Esq., Thomas D.
Bryan, Delmena
Burkes, Keith O.
Burnett, Theodore
Busskohl, Charles, member of Committee of Investors formed pursuant to Plan of
Reorganization
Byrne, Esq., Thomas M.
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Carter, John L.
Carter, Michael
Cartopia, LLC
Central Georgia Anesthesia Services, PC
Champagne, Jessie & Joyce
Clay, Rayshawn F.
Clay, Willie J.
Clay Real Estate Holdings, Inc.
Coleman, Esq., Michael V.
Coleman, Marco D.
Costell, Esq., Jeffrey Lee
Cranshaw, Esq., David W.
Culton, Leroy
Curtis, Betty
Curtis, George R., Sr.
Cutright, Eric
Daniels, Jerry A.
Daniels, LLC, Jerry A.
Danowitz, Esq., Edward F.
David Laird Family Trust
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Fox, Esq., Angela R.
Friday, Kheisha
Frison, Jr., Lee A.
Fryer, Schuster & Lester, P.C.
Gallassero, William J.
Gardner, Joseph and Lydia
Gayle, Raquel M.
Gebhardt, Esq., Guy G.
Geddes, Dr., Lloyd
George R. Curtis, Sr. Living Trust
Georgia Department of Revenue
Gist, Keenan P.
Gordon, David E., counsel to Committee of Investors formed pursuant to Plan of
Reorganization
Greenberg Traurig LLP
Grone, Carol
Grover, Jaswinder S., member of Committee of Investors formed pursuant to Plan
of Reorganization
GTO Development, LLC
Hadley, Phillip E.
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Haines, Aena Y.
Hall, Duvall & Claude
Hall, Evelyn
Hall, Keeling
Hamilton-Jones, Laverne
Harley-Lewis, Erinn F.
Harrington, Esq., Lee
Hays & Associates
Herbert, Glenn M.
Hinckson, Terrence
Hines, Bruce A. and Cynthia
Hoge Fenton Jones & Appel, Inc.
Holbein, Esq., Michael F.
Hooper, Gregory
Hooper, Lawrence
Hutchinson, Jr., William L.
IMA Real Estate Fund, LLC, Debtor
Internal Revenue Service
International Management Associates, LLC, Debtor
International Management Associates Advisory Group, LLC, Debtor
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International Management Associates Platinum Group, LLC, Debtor
International Management Associates Emerald Fund, LLC, Debtor
International Management Associates Taurus Fund, LLC, Debtor
International Management Associates Growth & Income Fund, LLC, Debtor
International Management Associates Sunset Fund, LLC, Debtor
International Medical Systems, LLC
Investment Law Group of Gillett, Mottern
Jackson, Linda C.
Jeffries, Martin D.
Jeter, George L.
Johnson, William E., member of Committee of Investors formed pursuant to Plan
of Reorganization
Jonathan H. Fain and Associates, P.C.
Jones, Laverne
Jones, Vicki L.
July, Clarence & Valerie
Kaufman, Esq., Mark S., counsel to Committee of Investors formed pursuant to
Plan of Reorganization
Kelley, Esq., Mark A.
Kilpatrick Stockton LLP, counsel to William F. Perkins, Plan Trustee
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C-8 of 12
Kitchens, Kelley, Gaynes, P.C.
Knight, Jr., Esq., James K.
LaBriola, Esq., Stephen T.
Laird, David
Laird, Deborah H.
Lamberth, Cifelli, Stokes & Stout, P.A.
Layne, Esq., Bernadine H.
Lester, Esq., William R.
Lewonski, Esq., Sharon M.
Louis, Charles H.
Mair, Manuel F.
Mair, Suzanne
Maughan, John & Roxanne
McBryan, Esq., Louis G.
McDade, William
McDonnell, Esq., Robert H.
McKenna Long & Aldridge LLP, counsel to Committee of Investors formed
pursuant to Plan of Reorganization
McManners, Thomas P.
Meir, Esq., Dennis S., counsel to William F. Perkins, Plan Trustee
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C-9 of 12
Miller, Hyacinth
Mills, III, Esq., John W., former counsel to William F. Perkins, Plan Trustee
Monnin, Esq., Paul
Moore, Joseph
Mottern, Esq., Robert J.
Mt. Nebo Baptist Life Center, Inc.
Mungovan, Esq., Timothy W.
Noble, Horace
Nixon Peabody, LLP
O’Neal, Roger L., member of Committee of Investors formed pursuant to Plan of
Reorganization
Office of United States Trustee
Page, Dexter M.
Paris, Calvin
Passyn, Esq., Juanita A.
Peoples, Valerie
Peoples-Wisneski, Michelle
Perkins, William F., Plan Trustee
Perkins, William T.
Perman, Jenny Lynn
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Perman, Todd
Phillips, Esq., Christopher D.
Pinkney, Carol
Pinkney, Laura
Pinkney, Roland
Platinum II Fund, LP, Debtor
Pollack, Charles I.
Porter, Jr., John C.
Qudsi, Mustafa
Randolph, Erich G.
Redfern, Fred C. & Sherri D.
Reese, James Eric
Regan, Sr., Stephen
Ricciardi, Anthony
Robison, David and Joni
Roger O’Neal Family Trust
Rossi, Elayne R.
Rue, James A.
Sablone, Esq., Jonathan
Sacca, Esq., James R.
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Sblendorio, Esq., Sblend A.
Secret, Esq., Akil Kenneth
Seymour, Booker T.
Shelton, Cornell
Shelton, III, J.
Shelton, James
Spikes, Takeo
Spizzirri, Esq., Paul M.
Spizzirri Law Offices
Star 6 Investments, Ltd.
Steele, Algernon O.
Stein, Esq., Grant T.
Stine, Esq., Kevin
Sutherland Asbill & Brennan, LLP
Tarabadkar, Dr., Sanjiwan
TBC Capital, Inc.
Thompkins, Karen
Tillett, Colleen H., former counsel to William F. Perkins, Plan Trustee
Treace, R. Jeneane
Trigg, Esq., Mark G.
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Tropper, Esq., Joshua
U.S. Securities and Exchange Commission
Wang, Ben Chang
Whonder, Ernest
Williams, Chasta N.
Williams-Cochrane, Rodney
Williamson, J. Robert
Wilson, Craig A. & Carole
Wisneski, David
Wisneski, Michelle F.
Withers, Bruce & Renee
Woods, Esq., Catosha L.
Work, Frederick T.
Worthy-Pickett, Cheryl
X-Spurts Investment Club of Atlanta, LLC
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TABLE OF CONTENTS
TABLE OF CONTENTS........................................................................................... i
TABLE OF CITATIONS.........................................................................................iii
I. STATEMENT OF THE ISSUES ................................................................... 1
II. STATEMENT OF THE CASE ...................................................................... 1
A. PROCEDURAL HISTORY.......................................................................... 1
B. STATEMENT OF THE FACTS.................................................................... 5
C. STANDARD OF REVIEW .......................................................................... 7
III. SUMMARY OF THE ARGUMENT ............................................................. 7
IV. ARGUMENT.................................................................................................. 9
A. AS VICTIMS OF A PONZI SCHEME, THE DEFRAUDED INVESTORS GAVE
“VALUE” WHEN THEY REDEEMED SOME OR ALL OF THEIR INVESTED
PRINCIPAL ACCORDING TO THE “GENERAL RULE.” ................................. 9
1. Under the “general rule,” the Defrauded Investors held a claimfor rescission immediately upon making their investment in the
fraudulent scheme and, when the Defrauded Investors redeemedsome or all of their principal, their rescission claim was reducedby each dollar of principal redeemed......................................... 9
2. The “general rule” is consistent with well settled concepts usedto evaluate whether a transferee gave value............................. 12
3. The definitions of “value”, “claim” and “debt” set forth in theBankruptcy Code and applicable state statutes support the“general rule.” .......................................................................... 15
B. THE DISTINCTION BETWEEN “DEBT” AND “EQUITY” IS IRRELEVANT TO
THE “FOR VALUE” ANALYSIS IN THE CONTEXT OF A PONZI SCHEME. .... 19
1. As the Bankruptcy Court found, “[t]he case law does not makethe distinction the Trustee proposes.”...................................... 19
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2. The Trustee’s distinction based on the form of the DefraudedInvestors’ investment is based on a fundamentalmisunderstanding of Eby.......................................................... 25
3. Terry Manufacturing is inapposite to the facts before this Court................................................................................................... 34
C. THE TRUSTEE’S “POLICY” ARGUMENTS CANNOT OVERCOME HIS CLASH
WITH WELL-SETTLED LAW. .................................................................. 36
1. The Bankruptcy Court’s ruling is premised on bedrock bankruptcy principles of claim priority and equal treatment of similarly situated claimants...................................................... 36
2. The Trustee relies on inapplicable portions of the BankruptcyCode to support his contrived argument. ................................. 37
D. THE TRUSTEE’S PROPOSED MODE OF “REDISTRIBUTION” IS NO FAIRER
THAN THAT IMPOSED BY THE “GENERAL RULE.” .................................. 38
E. THE TRUSTEE’S ARGUMENT IS PRECLUDED BY THE DOCTRINES OF RES
JUDICATA AND ESTOPPEL. ..................................................................... 41
1. The Trustee is barred by the doctrine of res judicata fromclaiming that the Defrauded Investors are not debt-holders. ... 43
2. The Trustee is also barred by the doctrine of estoppel fromclaiming that the Defrauded Investors are not debt-holders. ... 45
V. CONCLUSION............................................................................................. 47
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TABLE OF CITATIONS
Page(s)
CASES
Ainsworth v. Perreault,
563 S.E. 2d 135 (Ga. Ct. App. 2002)................................................................. 11
Atlanta Retail, Inc. v. Eastman Kodak Co. (In re Atlanta Retail, Inc.),294 B.R. 186 (Bankr. N.D. Ga. 2003) ............................................................... 46
Battle v. Liberty Mut. Fire Ins. Co.,623 S.E.2d 541 (Ga. Ct. App. 2005).................................................................. 46
Burnes v. Pemco Aeroplex, Inc.,291 F.3d 1282 (11th Cir. 2002) ......................................................................... 45
Camp v. Carithers,65 S.E. 583 (Ga. Ct. App. 1909)........................................................................ 11
Daniel v. Dalton News Co.,172 S.E. 727 (Ga. Ct. App. 1934)...................................................................... 11
Dicello v. Jenkins (In re International Loan Network, Inc.),160 B.R. 1 (Bankr. D.C. 1993) .......................................................................... 10
Donell v. Kowell,533 F.3d 762 (9th Cir. 2008) ...................................................................... passim
Eubanks v. FDIC ,977 F.2d 166 (5th Cir. 1992) ............................................................................. 43
First Union Commercial Corp. v. Nelson Mullins, Riley & Scarborough (In
re Varat Enters., Inc.),81 F.3d 1310 (4th Cir. 1996) ............................................................. 4, 34, 37, 43
Gray v. Manklow (In re Optical Techs., Inc.),246 F.3d 1332 (11th Cir. 2001) ..................................................................... 7, 41
Gunnin v. Dement,
422 S.E. 2d 893 (Ga. Ct. App. 1992)................................................................. 11
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Hildebrandt v. Ill. Dep't of Natural Res.,347 F.3d 1014 (7th Cir. 2003) ........................................................................... 41
Hovis v. General Dynamics Corp. (In re Hovis),396 B.R. 895 (D.S.C. 2007)............................................................................... 45
In re Chase & Sanborn Corp.,904 F.2d 588 (11th Cir. 1990) ........................................................................... 16
In re Hedged-Investments Associates, Inc.,84 F.3d 1286 (10th Cir. 1996) ............................................................... 31, 32, 33
In re Terry Mfg Co., Inc.,2007 WL 274319 (M.D. Ala 2007) ............................................................. 34, 35
In re USinternetworking, Inc.,310 B.R. 274 (Bankr. D. Md. 2004) .................................................................. 45
In re Young,294 F. 1 (4th Cir. 1923)...................................................................................... 27
Jobin v. Cervenka (In re M&L Bus. Mach. Co.),194 B.R. 496 (D. Colo. 1996)............................................................................ 10
Jobin v. McKay (In re M&L Bus. Mach. Co.),84 F.3d 1330 (10th Cir. 1996) ............................................................... 10, 17, 20
Johnson v. Studholme,
619 F.Supp. 1347 (D. Colo. 1985)......................................................... 31, 32, 41
Kingsley v. Wetzel (In re Kingsley),518 F.3d 874 (11th Cir. 2008) ............................................................................. 7
Kovacs v. Hanson (In re Hanson),373 B.R. 522 (N.D. Ohio 2007)......................................................................... 13
Levine v. Custom Carpet Shop, Inc. (In re Flooring Am., Inc.),302 B.R. 394 (Bankr. N.D. Ga. 2003) ............................................................... 17
Lisle v. John Wiley & Sons, Inc. (In re Wilkinson),196 Fed. Appx. 337 (6th Cir. 2006)................................................................... 13
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Mazzeo v. United States (in Re Mazzeo),131 F.3d 295 (2d Cir. 1997)......................................................................... 17, 18
Merrill v. Abbott (In re Independent Clearing House, Inc.),77 B.R. 843 (D. Utah 1987)................................................................... 10, 17, 20
Midwest Holding # 7, LLC v. Anderson (In re Tanner Family, LLC),556 F.3d 1194 (11th Cir. 2009) ......................................................................... 16
Official Comm. of Asbestos Pers. Injury Claimants v. Sealed Air
Corporation (In re W.R. Grace & Co.),281 B.R. 852 (Bankr. D. Del. 2002) .................................................................. 14
Rauch v. Shanahan,189 S.E. 2d 111 (Ga. Ct. App. 1972)................................................................. 11
Rosenberg v. Collins,624 F.2d 659 (5th Cir. 1980) ............................................................................. 10
Scholes v. African Enter., Inc.,
854 F. Supp. 1315 (N.D. Ill. 1994) .............................................................. 10, 31
Scholes v. Ames,
850 F.Supp. 707 (N.D. Ill. 1994)....................................................................... 31
Southmark Corp. v. Trotter, Smith & Jacobs,442 S.E.2d 265 (Ga. Ct. App. 1994).................................................................. 45
Wootton v. Barge (In re Cohen),875 F.2d 508 (5th Cir 1989)................................................................................ 42
Wyle v. C.H. Rider & Family (In re United Energy Corp.),944 F.2d 589 (9th Cir 1991) ....................................................................... passim
STATUTES
11 U.S.C. § 101 ................................................................................................ passim
11 U.S.C. § 544 ......................................................................................................... 2
11 U.S.C. § 548 ................................................................................................ passim
11 U.S.C. § 1102 ....................................................................................................... 1
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11 U.S.C. § 1141 ..................................................................................................... 43
O.C.G.A. § 13-5-5................................................................................................... 11
O.C.G.A. § 18-2-73................................................................................................. 16
O.C.G.A. § 18-2-78.......................................................................................... passim
O.C.G.A. § 23-2-60................................................................................................. 11
OTHER AUTHORITIES
Fed. R. Bankr. P. 7056 .............................................................................................. 7
Fed. R. Civ. P. 56 ...................................................................................................... 7
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I. STATEMENT OF THE ISSUES
Whether, as a matter of law, defrauded investor defendants who each made
an investment in a debtor entity, which at all relevant times was operated as a
Ponzi scheme, and thereafter received redemptions of their principal investment
received such redemptions “for value” as required to establish a defense to
fraudulent transfer claims under 11 U.S.C. § 548(c) and O.C.G.A. § 18-2-78(a) or
similar state laws.
II. STATEMENT OF THE CASE
A. PROCEDURAL HISTORY
On March 16, 2006 (the “Petition Date”), the substantively-consolidated
debtors (the “Debtors”) each filed voluntary petitions for relief under Chapter 11 of
Title 11 of the United States Code (the “Bankruptcy Code”). On March 27, 2006,
the United States Trustee appointed a committee of investors pursuant to 11 U.S.C.
§ 1102(a) (the “Committee”). On April 20, 2006, the United States Trustee
appointed William F. Perkins (the “Trustee”) as Chapter 11 trustee of the Debtors.
The Defendants-Appellees set forth on Exhibit A hereto are each defrauded
investor defendants (the “Defrauded Investors”)1 in certain adversary proceedings
1 In an effort to streamline the appeal process, and to minimize the burden onthe Court, the Defrauded Investors have agreed to prepare and file a unifiedbrief in response to the Trustee’s Principal Brief. Because the argumentsadvanced in this Brief are common to all Defendants-Appellees – not just the
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(the “Avoidance Actions”) commenced against them by the Trustee. The Trustee
filed 108 adversary proceedings in which he seeks to avoid and recover transfers
which the Debtors made to the investor Defendants-Appellees as a return of some
or all of their principal investments and, in some cases, as a distribution of
allegedly fictitious profits.
The Trustee seeks recovery of the challenged transfers based on his powers
of avoidance and recovery under fraudulent transfer law at 11 U.S.C. §
548(a)(1)(A) and (B) or applicable state law pursuant to 11 U.S.C. § 544(b). The
Trustee argues that the Debtors’ estate should recover the challenged transfers
because they were not an exchange “for value.”
In response, the Defrauded Investors have asserted their affirmative statutory
defenses including, inter alia, a defense under 11 U.S.C. § 548(c) and analogous
state law. Section 548(c) provides that a transferee “that takes for value and in
good faith…may retain any interest transferred…to the extent that such transferee
gave value to the debtor in exchange for such transfer.” 11 U.S.C. § 548(c).
Similarly, under applicable state law, “[a] transfer…is not voidable…against a
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Defrauded Investors – the Court should treat this Brief as having been filed forthe benefit of all Defendants-Appellees.
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person who took in good faith and for a reasonably equivalent value.” O.C.G.A. §
18-2-78.
Pursuant to Rule 7056 of the Federal Rules of Bankruptcy Procedure, the
Trustee filed a motion (the “Motion for Partial Summary Judgment”) seeking an
order by the Bankruptcy Court that, as a matter of law, the Defrauded Investors
cannot establish the “for value” element of their affirmative defense on grounds
that redemptions of principal received by the Defrauded Investors were not
transfers of “value.” Doc. 4. For purposes of considering the Trustee’s Motion for
Partial Summary Judgment, the Bankruptcy Court consolidated the Avoidance
Actions into a single Miscellaneous Proceeding.2 Doc. 1. On December 1, 2009,
the Bankruptcy Court entered an Order (the “Order”) denying the Trustee’s Motion
for Partial Summary Judgment. Doc. 38.
In its Order, the Bankruptcy Court recognized the “general rule” in the
context of a Ponzi scheme which “is that a defrauded investor receives ‘value’ to
the extent of the principal amount of its investment but not with regard to any
payments in excess of principal.”3 Doc. 38 at p. 6. The Bankruptcy Court rejected
2 Miscellaneous Proceeding No. 09-MP-601, United States Bankruptcy Courtfor the Northern District of Georgia.
3 The Bankruptcy Court limited its focus to the issue of avoidance and recoveryof principal contributions by the Defrauded Investors and did not address the
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the Trustee’s argument that the “general rule” cannot apply in the Avoidance
Actions because the investors acquired equity positions in the Debtors for three
reasons.
The Bankruptcy Court’s analysis was straight-forward and clear. First,
“well-established case law” has “uniformly established” the general rule allowing
“a defrauded investor to retain payments it receives up to the amount of its
invested principal” and “interpretation of the fraudulent transfer laws has made no
distinction based on the form of the investment.” Id . at pp. 11-12. Second , the
Bankruptcy Court concluded that “no principled basis exists for a different result
depending on the technical form of the fraudulent investment” because “it is the
substance, not the form, of the transactions” that “governs the reallocation of assets
in the aftermath of the collapse of the Ponzi scheme.” Id . at p. 12. Third , the
Bankruptcy Court found that bankruptcy law principles recognizing the priority of
debt creditors over the equity interests of an enterprise’s owners do nothing to
further the Trustee’s argument because in a Ponzi scheme any reallocation of the
debtor’s assets “is limited to the same class, that is, persons who have been
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issue of whether payments in excess of principal could be avoided andrecovered by the Trustee. Doc. 38 at p. 8, n. 9.
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fraudulently induced into unknowingly participating in the fictitious scheme.” Id .
at pp. 12-13.
Concurrent with the issuance of its Order, the Bankruptcy Court certified the
legal question presented for immediate review by this Court. Doc. 39. The
Trustee then filed a Petition for Leave to Appeal from the Bankruptcy Court’s
Order, which this Court granted by order dated February 17, 2010. The Trustee
filed his Principal Brief with this Court on April 23, 2010. The Defrauded
Investors now jointly submit this Responsive Brief.
B. STATEMENT OF THE FACTS
In order to address the legal issue before it, the Bankruptcy Court assumed,
for purposes of the Trustee’s Motion for Partial Summary Judgment only, the
Trustee established his prima facie case for the recovery of fraudulent transfers
from the Defrauded Investors.4 Doc. 38 at p. 8. As set forth in the Bankruptcy
Court’s Order and Certification of Direct Appeal, for the purposes of this appeal
the following facts are assumed: (i) Kirk Wright formed the Debtors purportedly to
manage and operate as hedge funds, each of which was structured either as a
4 The Bankruptcy Court’s assumption of these facts, however, did “not
constitute a determination of any of the assumed facts.” Doc. 38 at p. 8.Therefore, even if the Trustee prevails he must still “establish the existence of a Ponzi scheme and, for each [Defrauded Investor], the factual and legal basesfor a determination that each transfer in question is recoverable as a fraudulenttransfer.” Id . at pp. 8-9.
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limited liability company or a limited partnership; (ii) in reality, Wright used the
Debtors at all material times to operate a fraudulent Ponzi scheme whereby capital
contributions made into the Debtors by later investors were used to knowingly pay
earlier investors more than their investments were actually worth, including
nonexistent principal and fictitious profits, to perpetuate the illusion that the
Debtors had positive investment gains, to keep existing investors from seeking
recovery of their investments, and to induce prospective investors to make new
investments; (iii) each of the Defrauded Investors made a capital contribution
through execution of a limited liability company agreement, a limited partnership
agreement, and/or a subscription agreement with one or more of the Debtors such
that the Defrauded Investors held an interest in one or more of the Debtors
denominated as a membership unit or a limited partnership interest; (iv) during the
operation of the scheme, investors requested and received transfers from the
Debtors, representing returns of principal and/or purported profits on their
investments; and (v) at some time during the operation of the scheme, each
Defrauded Investor received one or more transfers of property from one or more of
the Debtors on account of such Defrauded Investor’s interest in one or more of the
Debtors. Id . at pp. 9-10; Doc. 39 at pp. 2-3.
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C. STANDARD OF REVIEW
A bankruptcy court's ruling as to summary judgment is reviewed de novo,
applying the same legal standard used by the bankruptcy court. See Kingsley v.
Wetzel (In re Kingsley), 518 F.3d 874, 876 (11th Cir. 2008) (applying the same
standard for summary judgment as the bankruptcy court); Gray v. Manklow (In re
Optical Techs., Inc.), 246 F.3d 1332, 1334 (11th Cir. 2001) (explaining "that an
appellate court reviews a bankruptcy court's grant of summary judgment de novo");
Fed. R. Bankr. P. 7056 (making Fed. R. Civ. P. 56's summary judgment standard
applicable in bankruptcy adversary proceedings). Summary judgment is proper "if
the pleadings, the discovery and disclosure materials on file, and any affidavits
show that there is no genuine issue as to any material fact and that the movant is
entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(c)(2). This Court must
view all evidence and make all reasonable inferences in favor of the nonmoving
party in making this determination. In re Optical Techs., Inc., 246 F.3d at 1334.
III. SUMMARY OF THE ARGUMENT
The Trustee’s Principal Brief conflicts with decades of well-settled case law.
At the behest, and upon the advice of the Committee,5 the Trustee urges the Court
5 While the Trustee was the nominal proponent of the Motion for PartialSummary Judgment and this appeal, the Committee and its legal counsel were
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to hold that victimized investors, like the Defrauded Investors, who have restitution
and rescission claims against an enterprise that is determined to be a Ponzi scheme,
cannot meet the “for value” prong of a fraudulent transfer defense under either
state or bankruptcy law. In essence, the Trustee argues, without support and
against the weight of precedent, that “value” for the purposes of establishing a
defense to avoidance and recovery does not exist under a restitution theory when
the initial investment at issue is “equity” rather than “debt.” The Trustee argues
that such equity investments should not be “transmuted” retroactively into debt for
the purposes of establishing a defense to avoidance and recovery. According to the
Trustee, this “transmutation” should not occur because the claims at issue are
unasserted “latent” restitution claims and, therefore, are not yet antecedent. Thus,
the Trustee concludes that no “value” was given in exchange for the challenged
transfers because the “equity” redeemed was worthless.
As discussed below, the Trustee’s position collides with a wave of contrary
case law, as the Trustee largely concedes. The only bankruptcy court case that the
Trustee can find to support his position did not involve a Ponzi scheme.
Overwhelmed by precedent, as recognized by the Bankruptcy Court in its Order,
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the principal architects of the Motion for Partial Summary Judgment and theTrustee’s Principal Brief. See PBr. at p. 3, n. 2.
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the Trustee’s argument necessarily relies on rhetorical flourishes and invented
terminology such as “claims2” and “transmutation without articulation” that is
apparently intended to create some counterweight to established law. The
Trustee’s reliance on terminology, unavailing below, must also fail here on appeal
in the face overwhelming contrary authority.
For the reasons set forth below, the Defrauded Investors respectfully request
that the Court affirm the Bankruptcy Court’s Order denying the Trustee’s Motion
for Partial Summary Judgment.
IV. ARGUMENT
A. AS VICTIMS OF A PONZI SCHEME, THE DEFRAUDED INVESTORS GAVE
“VALUE” WHEN THEY REDEEMED SOME OR ALL OF THEIR INVESTED
PRINCIPAL ACCORDING TO THE “GENERAL RULE.”
1. Under the “general rule,” the Defrauded Investors held a
claim for rescission immediately upon making their
investment in the fraudulent scheme and, when theDefrauded Investors redeemed some or all of their
principal, their rescission claim was reduced by each dollar
of principal redeemed.
In fraudulent transfer actions seeking recovery under a theory of
“constructive fraud,”6 the plaintiff trustee must establish, inter alia, that the debtor
received less than reasonably equivalent value in exchange for the challenged
6 The Trustee has neither alleged nor presented evidence that any of theDefrauded Investors are liable for actual fraud.
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transfer. See 11 U.S.C. § 548(a)(1)(B). Conversely, a defendant in a constructive
fraud case can establish a defense to the action if it can demonstrate that it received
the transfer in “good faith” and “for value.” See id .; O.C.G.A. § 18-2-78(a).
In Ponzi scheme cases, courts have uniformly held that a claim for
restitution or rescission arises against the fraudster at the time that the investment
is made for the amount of money invested in the scheme. See e.g. Wyle v. C.H.
Rider & Family (In re United Energy Corp.), 944 F.2d 589, 596 (9th Cir 1991);
Rosenberg v. Collins, 624 F.2d 659, 661 (5th Cir. 1980); Scholes v. African Enter.,
Inc., 854 F. Supp. 1315, 1326 (N.D. Ill. 1994). When an investor redeems some or
all of its principal, each dollar of principal redeemed reduces the defrauded
investor’s corresponding restitution or rescission claim. See e.g. Jobin v. McKay
(In re M&L Bus. Mach. Co.), 84 F.3d 1330, 1340-41 (10th Cir. 1996); In re United
Energy Corp., 944 F.2d at 595; Jobin v. Cervenka (In re M&L Bus. Mach. Co.),
194 B.R. 496, 501 (D. Colo. 1996); Merrill v. Abbott (In re Independent Clearing
House, Inc.), 77 B.R. 843, 861 (D. Utah 1987); Dicello v. Jenkins (In re
International Loan Network, Inc.), 160 B.R. 1, * 12 (Bankr. D.C. 1993). Courts
have uniformly held in Ponzi scheme cases that this return of principal satisfies an
antecedent debt and constitutes “value” for the purposes of establishing a defense
to fraudulent transfer claims under 11 U.S.C. § 548(c) and O.C.G.A. § 18-2-78(a)
or correlative state laws. See id .
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Under Georgia law, the Defrauded Investors held the same substantive rights
to rescission or restitution arising at the time of their initial investments. It is well
settled that fraudulent inducement of an investment is actionable in Georgia. See
Gunnin v. Dement, 422 S.E. 2d 893, 896 (Ga. Ct. App. 1992) (affirming jury
verdict in favor of defrauded investor in motorcycle franchise on claim for
rescission); Daniel v. Dalton News Co., 172 S.E. 727, 728-29 (Ga. Ct. App. 1934);
Camp v. Carithers, 65 S.E. 583, 585-86 (Ga. Ct. App. 1909). The defrauded
investor holds a right to rescission or restitution. See Ainsworth v. Perreault, 563
S.E. 2d 135, 137 (Ga. Ct. App. 2002) (“a party alleging fraudulent inducement”
can either “(1) affirm the contract and sue for damages from the fraud or breach; or
(2) promptly rescind the contract and sue in tort for fraud.”); Daniel, 173 S.E. at
729 (“the general rule that contracts obtained by fraud may be avoided by the party
defrauded, applies to a stock subscription induced by the fraud of the company
through its authorized agent”); accord O.C.G.A. § 23-2-60 (“Fraud will authorize
equity to annul conveyances, however solemnly executed.”); O.C.G.A. § 13-5-5
(“Fraud renders contracts voidable at the election of the injured party.”). Where,
as here, no interest is actually delivered in return for an investor’s initial payment,
explicit election to rescind and recover the full principal is not required because no
other relief is available. See Rauch v. Shanahan, 189 S.E. 2d 111, 113-14 (Ga. Ct.
App. 1972).
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In this case, the Bankruptcy Court correctly applied what it called the
“general rule,”7 in concluding that the Defrauded Investors gave value – in the
form of a reduction in their rescission claim – at the time that they redeemed some
or all of their invested principal. Doc. 38 at pp. 6-7; See Donell v. Kowell, 533
F.3d 762, 777-78 (9th Cir. 2008) ("Up to the amount that 'profit' payments return
the innocent investor's initial outlay, these payments are settlements against the
defrauded investor's restitution claim. Up to this amount, therefore, there is an
exchange of 'reasonably equivalent value' for the defrauded investor's outlay"). As
a result, the Bankruptcy Court properly denied the Trustee’s Motion for Summary
Judgment.
2. The “general rule” is consistent with well settled concepts
used to evaluate whether a transferee gave value.
The fundamental issue here is whether the Debtors received “value.”
“Reasonably equivalent value” compares what the “debtor surrendered and what
the debtor received irrespective of what any third party may have gained or lost.”
In re United Energy Corp., 944 F.2d at 597. “A transfer that alters the amount of
the debtor's assets and/or liabilities, while not altering net worth, is a transfer for
7 Even the Trustee admits that the Bankruptcy Court followed the “generalrule.” Principal Brief (“PBr.”) at p. 8.
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reasonably equivalent value.” Kovacs v. Hanson (In re Hanson), 373 B.R. 522,
526 (N.D. Ohio 2007). As one court noted, a trustee cannot “ignore[ ] the fact that
[the debtor]'s net worth remained the same after the transfer….‘the focus should be
on the overall effect on the debtor's net worth after the transfer.’” Lisle v. John
Wiley & Sons, Inc. (In re Wilkinson), 196 Fed. Appx. 337, 343 (6th Cir. 2006).
Here, the Debtors’ net worth remained unchanged as a result of the Debtors’
payment of principal to the Defrauded Investors because, pursuant to the “general
rule,” the Debtors’ exposure to the Defrauded Investor’s rescission claim was
reduced dollar-for-dollar by the payment of redeemed principal. As such, the
Debtor received value in exchange for returning principal to the Defrauded
Investors in the form of a reduced debt on the rescission claim.
The Trustee primarily attacks this notion by arguing that the Defrauded
Investors were “equity investors” and as such, the value of their “investment” was
zero the minute that they invested their money with the fraudster. Precedent
dictates, however, that the Defrauded Investors did not “invest” in the Debtors’
Ponzi scheme, as there never was any “equity” for them to purchase with their
investments. See In re United Energy Corp., 944 F.2d at 595-96; Donell, 533 F.3d
at 772. In Donell, the Ninth Circuit concluded that the defrauded investors did not
“invest” at all with the Defendants, reasoning that “Payments of amounts up to the
value of the initial investment are not, however, considered a 'return of principal,'
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because the initial payment is not considered a true investment.” Donell, 533 F.3d
at 772. Therefore, any amounts returned to the investor up to the amount of his or
her investment “are considered to be exchanged for ‘reasonably equivalent value,’
and thus not fraudulent, because they proportionally reduce the investors’ rights of
restitution.” Id. (citing United Energy Corp., 944 F.2d at 595). This Court should
follow the reasoning of the Donell Court, and conclude that any amounts returned
to the Defrauded Investors up to the amount of his or her investment are
considered to be exchanged for reasonably equivalent value and thus not
fraudulent, because they proportionally reduce the Defrauded Investors’ rights of
restitution.
Further, there is no basis on which to embrace the Trustee’s notion that the
Defrauded Investors’ inability or failure to articulate their restitution claims
somehow renders those claims meaningless or controverts the Bankruptcy Code.
Once again, the Trustee’s theory is contrary to existing authority. In Official
Comm. of Asbestos Pers. Injury Claimants v. Sealed Air Corporation (In re W.R.
Grace & Co.), 281 B.R. 852, 862 (Bankr. D. Del. 2002), the Court observed that
“[i]t cannot matter that the claimants themselves may have been unaware of their
own claim…a cause of action may exist before its owner is aware of it….[t]his
expansive language must negate any residual inference that a right to payment
must be known and asserted to be a claim.” Here, contrary to the Trustee’s
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argument, whether the Defrauded Investors knew about their claims for restitution
has no effect on either (i) the creation of the right to rescission or restitution (which
arose precisely because the Defrauded Investors did not know about it at the time),
or (ii) the satisfaction of it (the Debtors owed the Defrauded Investors’ their
money; if the Debtors paid that debt without the Defrauded Investors ever learning
about the fraud, then the liability for restitution would still be satisfied).
3. The definitions of “value”, “claim” and “debt” set forth in
the Bankruptcy Code and applicable state statutes support
the “general rule.”
In challenging the general rule concerning “value,” the Trustee points to the
term “antecedent debt” in the Bankruptcy Code and applicable state law. In doing
so, the Trustee effectively defines “value” to mean that the Defrauded Investors
could have given “value” only where “what was originally a loan or a contractual
agreement” gave rise to their claim against a debtor. PBr. at pp. 13-14. Tellingly,
the Trustee ignores the definitions of “debt” and “claim” set forth in the
Bankruptcy Code, which, when read together, support the application of the
general rule. Id .
“Value” includes the satisfaction of a present or antecedent debt of the
debtor. See 11 U.S.C. § 548(d)(2)(A) (defining “value” as “property, or
satisfaction or securing of a present or antecedent debt of the debtor, but does not
include an unperformed promise to furnish support to the debtor or to a relative of
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the debtor . . .” ); see also O.C.G.A. § 18-2-73(a) (stating the “value” is given for a
transfer if, in exchange for the transfer, “property is transferred or an antecedent
debt is secured or satisfied . . . .”). By definition, therefore, the Defrauded
Investors gave “value” in redeeming some or all of their principal investment if the
transfer satisfied a “debt” of the Debtors.
The intellectual underpinning for the general rule is set forth in the
definitions of “debt” and “claim” under the Bankruptcy Code. The Bankruptcy
Code defines “debt” as “liability on a claim.” 11 U.S.C. § 101(12). The
Bankruptcy Code defines “claim” broadly to include, without limitation, “ 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 . . .” 11 U.S.C. § 101(5)(A) (emphasis supplied).
Many courts, including this one, have acknowledged the coextensive use of
the terms “debt” and “claim” in the Bankruptcy Code. See e.g. Midwest Holding #
7, LLC v. Anderson (In re Tanner Family, LLC), 556 F.3d 1194, 1196 (11th Cir.
2009) (“By making the terms debt and claim coextensive, Congress has adopt[ed] [
] the broadest possible definition of debt….Accordingly, a debtor incurs a debt to a
creditor when the creditor has a claim against the debtor, even if the claim is
unliquidated, unmatured, unfixed, or contingent.”) (emphasis in original; internal
quotations and citations omitted); In re Chase & Sanborn Corp., 904 F.2d 588, 595
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(11th Cir. 1990) (“It is established that ‘debt’ is to be given a broad and expansive
reading for purposes of the Bankruptcy Code”).
This “co-extensive” use of the terms “debt” and “claim” has caused courts to
conclude that a defrauded investor’s claim for rescission constitutes a “debt.”
For example, in In re Independent Clearing House Co., the Court held that:
From the time [an investor] entrusted his money to the debtors, he hada claim against the debtors for the return of his money. We believethat the Code’s definition of ‘debt’ and its related terms is broad
enough to cover the debtors’ obligation to return a defendant’s
principal undertaking, whether that obligation was based on the contract between the debtors and [the investor] or was based on [the
investor’s] right to restitution.
In re Independent Clearing House Co., 77 B.R. at 857 (emphasis supplied); see
also In re M&L Bus. Mach. Co., 84 F.3d at 1340-41; In re United Energy Corp.,
944 F.2d at 595-96 (“The Code does not require that a ‘debt’ be a contractual
liability. Instead, ‘debt’ is defined as a liability on 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. .
. .’”) (emphasis supplied); accord Mazzeo v. United States (in Re Mazzeo), 131
F.3d 295, 302 (2d Cir. 1997) ("[T]he term 'debt' is sufficiently broad to cover any
possible obligation to make payment.") (emphasis supplied; quotation marks and
citation omitted); Levine v. Custom Carpet Shop, Inc. (In re Flooring Am., Inc.),
302 B.R. 394, 400 (Bankr. N.D. Ga. 2003).
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These cases establish that an exchange “for value” is not limited to an
exchange in satisfaction of a traditional debt instrument, as the Trustee contends.
Instead, the “value” element under Section 548(c) and applicable state law is
satisfied by an exchange in satisfaction of “any possible obligation” of the debtor
to make payment, In Re Mazzeo, 131 F.3d at 302, including the “liquidated,
unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal,
equitable, secured, or unsecured” rights of transferees. See 11 U.S.C. § 101(5)(A).
The Defrauded Investors’ claims for rescission against the Debtors, which even the
Trustee admits arose at the time of the initial investment in the Ponzi scheme, PBr.
at p. 17, fit within the broad, coextensive definitions of “claim” and “debt” set
forth in the Bankruptcy Code. Thus, the exchange of these rescission claims for
redeemed principal constitutes an exchange “for value” under Section 548(c).
Given this simple and logical explanation, the Trustee’s theory of
“transmutation” is exposed for what it is -- a rhetorical device intended to
complicate and de-legitimize the Defrauded Investors’ valid claim that they gave
value when then redeemed some or all of their principal. As between the
Defrauded Investors’ Code-based explanation, and the Trustee’s transmutation
theory, the Court should apply the principle of “Occam’s razor,” which has been
loosely translated to mean that the simplest explanation is often the best. Here, the
simple explanation is the right one. There is no need for a “claim” to “transmute”
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into “debt” because the definition of “claim” is co-extensive with the definition of
“debt.” Under the Bankruptcy Code, they are already one and the same.
B. THE DISTINCTION BETWEEN “DEBT” AND “EQUITY” IS IRRELEVANT
TO THE “FOR VALUE” ANALYSIS IN THE CONTEXT OF A PONZI
SCHEME.
Faced with a “general rule” expressly counter to his position, the Trustee has
labored to present a distinction between this case and the litany of cases reciting
and endorsing the “general rule” based on the form of the Defrauded Investors’
initial investment. This distinction is irrelevant for at least three reasons.
1. As the Bankruptcy Court found, “[t]he case law does not
make the distinction the Trustee proposes.”
The Bankruptcy Court correctly found that “[t]he case law does not make
the distinction the Trustee proposes” concerning “debt” versus “equity” in a Ponzi
scheme context. Doc. 38 at p. 10. Courts have routinely found that a fraudulent
inducement claim lies for each defrauded defendant in an avoidance action,
regardless of whether the investor was induced to invest in a debt instrument or an
equity instrument. For example, in In re Independent Clearing House Co., the
Court held that:
If there was not a valid contract between the debtors and [an investor],before the transfer [the investor] would have had a claim forrestitution, to prevent the debtors’ unjust enrichment. See Restatementof Restitution § 1 (1936). If there was a valid contract that gave the
[investor] an equity interest in the debtors’ business, as the trusteecontends, the [investor] would still have had a right to restitution if
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the debtors’ fraud induced him to enter into the contract. SeeRestatement (Second) of Contracts, §§ 164 & 376 (1979).
In re Independent Clearing House, 77 B.R. at 857, n. 24 (emphasis supplied). The
Trustee cites to no legal authorities or public policy rationale for treating defrauded
investors differently, based simply on whether their investments are characterized
as debt or equity. Nor does the Trustee offer any legal support for the proposition
that an innocent investor who is duped into acquiring an interest in a limited
liability company or limited partnership has no right of rescission for fraudulent
inducement, just as any other defrauded party to a contract would have under
applicable bankruptcy or state law.
The Trustee’s attempts at distinguishing cases from other Circuits that
support the Defrauded Investors’ position similarly fail. For example, In re M & L
Business Machine Co. involved an investor entering into a contract to invest with
the debtor that was later determined to be a Ponzi scheme. In re M & L Business
Machine Co., 84 F.3d 1330. The Tenth Circuit affirmed the lower court’s
determination that the pre-petition payments from the debtor to the investor
constituted “value” within the meaning of Section 548 because the investor had the
right to rescind the contract and seek restitution of the amounts invested under
Colorado law. Id . at 1341-1342. The Defrauded Investors here have the same
substantive rights under Georgia law as the investors in M & L Business Machine
Co. See id.; Section IV. A. 1., supra.
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Similarly, the Trustee cites Donell as another example of investors who held
“antecedent debt claims,” rather than equity interests, in a limited liability
company or limited partnership. PBr. at 24-25. The Ninth Circuit, however, never
made such a distinction in its opinion. To the contrary, the Donell Court broadly
stated:
Where causes of action are brought under UFTA againstPonzi scheme investors, the general rule is that to theextent innocent investors have received payments inexcess of the amounts of principal that they originally
invested, those payments are avoidable as fraudulenttransfers[.]
Donell, 533 F.3d at 770. And where innocent investors receive payments that are
less than their respective investments in the fraudulent enterprise, the Ninth Circuit
held that payments are not avoidable, without any characterization of such
payments as dividends, debt service, redemptions, or otherwise:
If the net [of deposits vs. withdrawals] is negative, thegood faith investor is not liable because paymentsreceived in amounts less than the initial investment,being payments against the good faith losing investor’sas-yet unsatisfied restitution claim against the Ponzischeme perpetrator, are not avoidable within the meaningof UFTA.
Id. at 771 (internal citations omitted).8
8 The Ninth Circuit further explains: “Payments of amounts up to the value of the initial investment are not, however, considered a ‘return of principal,’
(Footnote continued on next page)
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Two other Ninth Circuit decisions demonstrate that the critical test for
“value” in a fraud case is not “was it debt or equity?” but rather “was there fraud
and, if so, did the fraud exist at the time of the initial investment?” In In re United
Energy Corp., the Ninth Circuit reasoned that because the investors were duped
into the initial investment, they had acquired a claim for rescission and restitution
at the time they invested. In re United Energy, 944 F.2d at 596 (“[The investors]
clearly had claims for rescission and restitution which arose when they
[invested]”). The United Energy Court explicitly held that the investors’ claims for
rescission and restitution existed at the time of investment “regardless of whether
there existed a contractual right to the return of principal” because the Code does
not require recovery on “a contractual liability” for an exchange of “value.” Id . at
595.
Relying on In re United Energy Corp., the trustee in In re AFI Holdings
sued a limited partner to avoid a fraudulent transfer. See 525 F.3d 700 (9th Cir
2008). The partner argued that he was entitled to keep the funds transferred to him
(Footnote continued from previous page)
because the initial payment is not considered a true investment.” Donnell, 533
F.3d. at 772. Any amounts returned to the investor up to the amount of his orher investment “are considered to be exchanged for ‘reasonably equivalentvalue,’ and thus not fraudulent, because they proportionally reduce theinvestors’ rights of restitution.” Id. (citing In re United Energy Corp., 944F.2d at 595).
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because he paid reasonably equivalent value for the transfers. See id. The trustee
argued that the transfers were essentially a distribution on account of a partnership
interest relative to an investor’s capital contribution and were not reasonably
equivalent. See id. at 704. The court held that, because the partner was duped into
his initial investment, the good faith exception was not barred as a matter of law, in
determining whether the trustee could avoid the transfers under the Bankruptcy
Code. See id . at 708.
The Ninth Circuit found that, because the partner was initially duped into
becoming a partner, and because the fraudulent enterprise was already in existence
at the time of the initial investment, the partner had a claim for restitution that
arose at the time of his initial buy-in. See id. at 708-709. In reaching this
conclusion, the court found that the rights of a defrauded investor are created at the
time of the investment. See id. at 708. A defrauded investor is entitled to a claim
for rescission and restitution based on the fraud.
Just as in AFI Holdings, the Defrauded Investors here were defrauded into
making their initial investments with the Debtors and, therefore, acquired
restitution claims the moment they invested funds into the enterprise, regardless of
the form of the investment (i.e., as equity partners or contract obligees). Id. at 708.
The Defrauded Investors did not intend to invest in a Ponzi scheme; the legitimate
enterprise in which they thought that they were investing never existed. The type
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of fictitious interest that a defrauded investor receives from a Ponzi scheme
operator is irrelevant to determining whether that investor is entitled to assert a
restitution claim up to the amount of its initial investment.
As demonstrated by In re AFI Holdings, the Ninth Circuit’s most recent
pronouncement on this issue, and In re United Energy Corp., the critical inquiry is
whether Ponzi scheme investors were duped into their initial investment and
acquired a right for rescission and restitution concurrent with their investment. Id.
at 708-709; In re United Energy Corp., 944 F.2d at 596, n. 7. The Trustee attempts
to diminish In re AFI Holding by claiming that it “blithely” applied the “general
rule” and “failed to conduct any reasoned analysis” regarding the Trustee’s
contrived distinction based on the form (i.e., equity or debt) of the subject initial
investment. PBr. at pp. 39-40. This conclusory assertion adds nothing to the
discussion, and is essentially identical to the position that the trustee advanced in
In re AFI Holding. The Ninth Circuit rejected that position, stating:
The Trustee argues that the parties did not expresslyexchange the restitution claim for the $89,824.17, andinstead, AFI transferred the money on account of [thedefrauded investor’s] partnership interest. Althoughcircumstances of the exchange were cloaked in terms of a
partnership interest, we delve beyond the ‘form’ to the‘substance’ of the transaction. See United Energy, 944F.2d at 596.
As noted above, the record demonstrates that Eisenberg’soperation was a Ponzi scheme before [the investor]provided his principal ‘investment,’ and thus well before
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the transfers were made from AFI to [the investor].Because of this, [the investor] acquired a restitution claimat the time he bought into Eisenberg’s Ponzi scheme, justas the investors in United Energy acquired a restitutionclaim at the time they bought their solar modules. Id. at
596. It is this restitution claim, in toto, that [the investor]exchanged when AFI returned [the investor’s] principal‘investment’ amount.
AFI Holdings, 525 F. 3d at 708. Consistent with the Ninth Circuit’s reasoning, the
Bankruptcy Court held that “[t]he substance, not the form, of the transaction
properly governs the reallocation of assets in the aftermath of the collapse of [a]
Ponzi scheme.” Doc. 38 at p. 12.
2. The Trustee’s distinction based on the form of the
Defrauded Investors’ investment is based on a fundamental
misunderstanding of Eby.
The holding in Eby is straightforward: that a rescission claim based on
fraudulent inducement arises at the time of a defrauded investor’s initial
investment. Eby, 1 F.2d at 973. This holding directly supports the Defrauded
Investors’ position that the Debtors’ fraud gave rise to a claim for rescission equal
to the amount of their invested capital at the time of the investment and that the
subsequent exchange of such rescission claims upon redeeming their investment
constitutes giving “value” under Section 548(c). The Trustee spends a significant
portion of his brief attempting to “distinguish” the facts in Eby and its progeny
from the present case, and then arguing that those court’s following Eby
“misinterpreted” the decision. The Trustee is wrong.
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The Trustee claims that Eby has no application to the current case because
the investors in Eby maintained a “debt-based investment claim” “that arose from
the initial investment in the scheme.” PBr. at p. 20. According to the Trustee, “the
existence of another claim based on the latent fraud claim in Eby in no way affects
the ultimate outcome of the value exchange analysis” and, therefore, Eby’s
recognition that a fraudulent inducement claim arises at the time of a defrauded
investor’s initial investment “must be recognized as surplusage.” PBr. at pp. 20-
21.
Nothing in Eby supports this assertion. To the contrary, the scheme
described in Eby and the nature of the defrauded investors’ interests in that scheme
are closely analogous to the (assumed) facts in this case. In fact, the Eby fraudster,
Mr. Young, ran what can be fairly described as a progenitor to the modern “hedge
fund.” Young solicited investors to whom he issued receipts and whose monies
were “to be placed to the credit of the customer in an account opened and managed
by [Young], for the purpose of buying and selling any securities traded on the New
York Stock Exchange.” Eby, 1 F.2d at 971-72 (internal quotation omitted). Young
was allowed as “compensation for his management of the account one-third of the
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net profits produced to the customer.”9 Id . at 972. The enterprise made monthly
settlements to each investor and each investor maintained “the right to withdraw all
or any part of his account upon 30 days' written notice.”10 Id .
Young regularly distributed referral “commissions” and “profits” to his
customers despite the enterprise’s substantial actual losses. In re Young, 294 F. 1,
1 (4th Cir. 1923).11 These distributions were “taken from the principal sums
deposited by his customers” in furtherance of Young’s Ponzi scheme. Id . Mr.
Ashley was one such customer. Eby, 1 F.2d at 972. Ashley made payments to
Young totaling $3,000 and received distributions totaling $4,576.68 (his entire
principal investment and $1,576.68 in so-called “profits”). Id . It was the order of
Young’s payments to Ashley, however, which required to Eby Court to issue its
key holding. Ashley received distributions of $1,576.68 in “profit” prior to his
written request for redemption of his principal investment. Id . Subsequently,
9 Under the exemplar documents relied upon by the Trustee here, the Debtorswere similarly entitled to retain a portion of “profits” as an “incentiveallocation,” while the Debtors’ manager collected “management fees” and“performance fees.” See e.g. Doc. 6-3 at pp. 5-6; Doc. 6-4 at p. 15.
10 Here, the Debtors also allowed investors to withdraw all or part of theirinvestments upon 30 days’ written notice to the Debtors. See e.g. Doc. 6-8 at
p. 44; Doc 6-7 at p. 18.11 In re Young is a companion case to Eby, which determined the relative rightsof defrauded investors to distributions from the residual estate, holding thatdistribution to defrauded investors was to be in proportion to their principalinvestment net of any profits they received. See In re Young, 294 F. 1 at 4.
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Ashley received a lump sum payment of his $3,000 principal pursuant to his
written request. Id .
The trustee in bankruptcy sued Ashley to recover all of the payments made
to him through three separate claims:
(1) For the recovery of the payment of $3,000, as apreference within four months of bankruptcy; (2) for therecovery, as a preference within four months, of $1,423.32, the difference between $3,000, the sum paidto Young by Ashley and $1,576.68, the amount paid toAshley by Young under the form of "profits"; (3) for the
recovery of the sum of $1,576.68 paid by Young toAshley as profits, on the allegation that it was paid byYoung to Ashley without consideration as a gratuity, andin fraud of the rights of Young's creditors.
Id . The Eby Court addressed each of the trustee’s claims independently. With
regard to the claim “(3),” the trustee’s claim for recovery of the initial $1,576.68
received by Ashley, the Eby Court determined that this amount “should not be
returned as a preference” because “Ashley had no reason to suppose Young to be
insolvent” at the time. Id . at 973.
The Eby Court then addressed the intuitive notion of simply disposing of
these initial payments of “profit,” where there was no actual profit to be had, as a
fraud upon “the rights of Young’s creditors” (i.e., a fraudulent transfer). Id . at 972-
73. The Eby Court dismissed this notion, holding that, at the time Young paid
$1,576.68 to Ashley, Young owed Ashley $3,000 “which Ashley had a right to
recover from him from the moment that he was deceived into paying it.” Id . at
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973 (emphasis supplied). Thus, at the time of that payment “Ashley received the
money in good faith” and “Young’s debt of $3,000 to Ashley was reduced” by the
amount of $1,576.68.12 Id .
Despite the Trustee’s belabored arguments to the contrary, this holding is
anything but “surplusage.” The Eby Court addressed each of the trustee’s claims
independently, including his claim that Ashley’s initial redemption of principal
was “in fraud of the rights of Young’s creditors.” Id . at 972-73. The Eby Court
held this redemption was not “in fraud” on grounds that Ashley maintained a
countervailing rescission claim “ from the moment that he was deceived ” into
investing. Id . at 973. The Eby Court engaged in a separate analysis of Ashley’s
redemption pursuant to his request for return of $3,000 in “principal” and
irrespective of whether that later transfer was made pursuant to an equity or debt
interest. Therefore, Eby’s holding is quite simple and precisely on point – in the
aftermath of a Ponzi scheme defrauded investors have claims for rescission or
12 Based on the same concept, the Eby Court affirmed a jury verdict in favor of Ashley with regard to the trustees’ claim “(2),” allowing him to retain the
remaining $1,423.32 Young later paid to him (as part of a lump $3,000payment). Eby, 1 F.2d at 973. As to claim “(1),” the Eby Court upheld a juryverdict in favor of the trustee, in part, for recovery of the $1,576.68 Youngpaid to Ashley (as part of a lump $3,000 payment) on grounds that it waswithout consideration and “therefore a fraud on Young’s creditors.” Id .
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restitution, which arise at the time of their initial investment, and, therefore, they
have given due consideration for any redemptions of principal. See id .
Nothing in the decision supports the claim that investors held a “debt-
based”13 investment claim against Young (as distinct from a debt-based restitution
claim) or that the investors’ principal was not at risk. There is also nothing in the
decision that would support the view that the Eby Court based its holding on a
finding or belief that the investors held debt interests, as opposed to equity
interests, in the debtor. Because there is no basis on which to conclude that the
investors in Eby held debt interests or that Eby’s holding is in any way
“surplusage,” the Trustee’s tortured “claims2” construct collapses.
As with his treatment of Eby, the Trustee attempts in vain to distinguish the
cases that similarly protect distributions of principal to “equity holders” from
avoidance actions in the aftermath of a Ponzi scheme. PBr. at pp. 36-57. The
Defrauded Investors have already discussed above the relevance of AFI Holding
and other Eby progeny and the Trustee’s flawed efforts to distinguish them. The
13 The Trustee mischaracterizes the Eby Court’s reference to “debt.” PBr. at p.19. Rather than using the word “debt” to describe the nature of Ashley’s initial
investment in the fraudulent enterprise, the Eby Court simply characterizesAshley’s rescission claim, arising at the very moment he was deceived intoinvesting, as a “debt” Young owed to him. Eby, 1 F.2d at 973. The Trusteetakes the Eby Court’s reference to “debt” out of context in an effort to give itdeeper meaning.
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Trustee also briefly addresses, but fails to diminish, two other cases - Scholes and
In re Hedged-Investments Associates, Inc. PBr. at pp. 36-37.
The first of these two cases, Scholes v. Ames, 850 F.Supp. 707 (N.D. Ill.
1994), involves an equity receiver operating under Illinois law, as opposed to a
bankruptcy trustee. There, the equity receiver sued two investors who purchased
limited partnership interests in what turned out to be a fraudulent Ponzi scheme.
Id. at 709. The equity receiver only sought to recover fictitious profits from those
investors, based on fraudulent conveyance, unjust enrichment, and constructive
trust claims under Illinois law. Id. at 710. The district court in Scholes did not
even discuss, let alone reject, the proposition that the defrauded investors had
claims for rescission and restitution under applicable non-bankruptcy law. It
would appear those claims were unnecessary in Scholes because the equity receiver
never tried to recover the principal sums invested, unlike the Trustee here. The
equity receiver focused solely on the fictitious profits.14
14 The district court in Scholes relied, in part, on another equity receiver case, Johnson v. Studholme, 619 F.Supp. 1347 (D. Colo. 1985). See Scholes, 850F.Supp at 714-715. The Johnson decision provides insight into the inherentproblem with any attempt to re-allocate losses among the various investors,
even as to fictitious profits:Some investors who received ‘fictitious profits’ mayhave spent the money on education or other necessitiesmany years ago. What else in equity and good conscienceshould plaintiffs who received money in good faith
(Footnote continued on next page)
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The Trustee’s interpretation of In re Hedged-Investments Associates, Inc., 84
F.3d 1286 (10th Cir. 1996), is similarly flawed. See PBr. at pp. 36-37. In re
Hedged-Investments involved purported equity participation in limited
partnerships, as some of the debtor entities were organized here, and the Tenth
Circuit affirmed the generally accepted principle that an investor has a valid
restitution claim against the defrauding party to recover the amount of principal
that he or she invested. In re Hedged Investments , 84 F.3d at 1289. While
focusing on the Tenth Circuit’s treatment of the subject investor’s fictitious profits,
the Trustee utterly ignores key portions of the decision that debunk the Trustee’s
so-called “transmutation” theory altogether:
(Footnote continued from previous page)
pursuant to an ‘investment contract’ have done? In
contrast, some investors who lost money may have beenspeculators who were prepared to lose their investments.There is simply no neat answer to the various equitiesinvolved here where the investors never knew each otherand were equally at fault for trusting [the Ponzi schemeoperator]. ‘Unexpected gains or losses by equallyinnocent parties may present similar problems, notcapable of resolution by unjust enrichment principles.’
Law of Remedies, § 4.1 (1973). There is no precedent in
law or equity for applying unjust enrichment principlesin these circumstances. In such circumstances the
courts may simply leave the parties where they were
found.
Johnson, 619 F.Supp. at 1350 (emphasis supplied).
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Ms. Buchanan [the investor defendant] received thetransfers at issue after already receiving approximately$1 million more than her original $750,000 investment.The district court found that since Ms. Buchananreceived more than she invested she did not have a viableclaim for fraud. In effect, the district court determined
Ms. Buchanan had already received restitution and
therefore was entitled to no remedy. The district court’s
observations are correct insofar as restitution is the
remedy to which Ms. Buchanan would be entitled [.]
Id. at 1289 (emphasis supplied).
In other words, the Trustee completely missed (or ignored) the point that the
Tenth Circuit had determined that an investor who held a limited partnership
interest (as opposed to a promissory note or other debt instrument) has the same
claim of restitution against the Ponzi scheme operator. Id. Because the investor
there had already received payments in excess of her principal investment, she
“had already received restitution [.]” Id. at 1289. The nature of the investment – a
limited partnership interest as opposed to a promissory note – was, is, and should
continue to be immaterial to the investor’s right to restitution.
The Trustee is no more successful in his analysis of the key third case from
the Ninth Circuit, AFI Holding. As the Defrauded Investors discussed in greater
detail above, AFI Holding also involved investment in a limited partnership
operating as a Ponzi scheme and, once again, the Ninth Circuit endorsed and
applied the uniform rule that investors in a Ponzi scheme acquire claims for
rescission at the time of their initial investment and that upon redemption of their
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investment those rescission claims were exchanged for their return of their
principal. 525 F.3d at 708.
In light of Eby, and the unbroken line of more recent cases that follow it, the
Trustee’s contrived “claim2” analysis and “transmutation” theory are completely
unsupported. The Trustee has manufactured a convoluted theory to confuse a
simple and straightforward principle -- a party who is fraudulently induced to make
an investment, of any kind and in any form, may rescind the transaction and
recover his or her principal investment in restitution.
3. Terry Manufacturing is inapposite to the facts before this
Court.
The Trustee relies on In re Terry Mfg Co., Inc., 2007 WL 274319 (M.D. Ala
2007), for the proposition that equity holders are not entitled to recharacterize
dividend distributions as claims for the purpose of establishing a “for value”
defense to an avoidance action. See PBr. at 42-44. However, Terry is
distinguishable from this case for at least two reasons.
First, Terry did not involve a Ponzi scheme. Terry Manufacturing was a
viable business entity that had contracted with both the Department of Defense and
McDonalds to manufacture uniforms. In re Terry Mfg Co., Inc., 2007 WL 274319
at *4. The principals/managers looted the company’s finances, filed false financial
statements and paid shareholder dividends to keep up the façade that Terry was a
profitable business entity, when it was insolvent. Id . at *5.
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Second , the holding in Terry is fundamentally inapposite to the present
matter because the trustee in that case sued to avoid dividend payments to equity
partners; Terry was not a case where the trustee was seeking to avoid payments
from investors whose initial investment was procured through fraud. Id. at * 5-7.
Terry did not involve a Ponzi scheme in which new investors’ money was used to
fund distributions to prior investors. There is no finding in Terry that new
shareholder dollars were used to pay dividends to existing shareholders. In Terry,
the trustee sought to recover dividends paid to shareholder defendants. The nature
of a “dividend” (commonly defined as money earned on stock holdings, that
represents a share of profits paid in proportion to the share of ownership) does not
lend itself to a Section 548(c) defense because a right to a dividend “accompanies”
the equity interest manifest in the shares; the shareholder does not “give up”
anything when receiving a dividend on equity. They do not give up shares, nor is
their investment diluted by the dividend. Here, the challenged payments were not
treated as dividends and the Trustee does not allege so. Terry is therefore readily
distinguished from the present cases.
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C. THE TRUSTEE’S “POLICY” ARGUMENTS CANNOT OVERCOME HIS
CLASH WITH WELL-SETTLED LAW.
1. The Bankruptcy Court’s ruling is premised on bedrock
bankruptcy principles of claim priority and equal treatment
of similarly situated claimants.
The Bankruptcy Court, in considering and dispensing with the Trustee’s
erroneous position that payments made on account of equity investments (as
distinct from debt obligations) requires a different result in the context of a Ponzi
scheme held that any different treatment traditionally rendered to debt holders
versus equity holders is irrelevant because all of the claimants made the same type
of “investment” in the Debtors’ scheme. Doc. 38 at p. 12. While, traditionally, the
Bankruptcy Code draws distinctions between debt and equity for purposes of
establishing claims priority, that notion is not relevant here because, as the
Bankruptcy Court correctly concluded, all of the Defrauded Investors occupy the
“the same class” in terms of claims priority. Even assuming that the Trustee was
correct that the claims at issue here are equity claims and not debt claims, the net
effect of ignoring the general rule embraced by the Bankruptcy Court to effect the
Trustee’s redistribution scheme would not accomplish the Bankruptcy Code’s goal
of prioritizing debt claims over equity claims because all the claims here belong to
Defrauded Investors who, by the Trustee’s logic, all hold equity claims.
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2. The Trustee relies on inapplicable portions of the
Bankruptcy Code to support his contrived argument.
Toward the end of the Trustee’s Principal Brief, the Trustee makes two
statutory arguments that no court has ever accepted. See PBr. at pp. 50-55. First,
the Trustee argues that allowing “transmutation” of the equity claims into debt is
inconsistent with Section 510(b) of the Bankruptcy Code. Id . at pp. 50-52. But
this argument conflates two provisions and aims of the Bankruptcy Code,
effectively transmuting statutory “apples” to “oranges.” Section 510(b) is a claims
priority provision dealing with claims arising in connection with the purchase and
sale of stock. The Defrauded Investors are not seeking to elevate equity claims
above creditor claims. They hold claims based on their rights of rescission and are
merely articulating an element of a defense to a fraudulent transfer action based on
those claims. The present action does not raise issues of claims priority or
distribution of estate assets.
Second , the Trustee looks to the equitable treatment of similarly situated
creditors in plan provision sections of the Bankruptcy Code, such as Section 1123
and 1129. Id . at pp. 53-55. The cited provisions deal with voting rights under a
plan by holders of allowed claims against the estate. They do not consider the
merits of the underlying claims, nor do they deal with establishing defenses to
avoidance actions under Section 548. The Defrauded Investors do not challenge
the overarching bankruptcy policy that seeks equitable treatment of similarly
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situated creditors. But the Trustee’s avoidance actions are not part of the claims
resolution or plan voting processes. More importantly, the Trustee’s misplaced
reliance on these unrelated provisions of the Bankruptcy Code draws the
fundamental flaw in his position into specific relief; the Defrauded Investors are
not asserting claims or defenses based on an equity interest. The Defrauded
Investors are seeking to establish a defense based on a long-recognized legal claim
for rescission.
D. THE TRUSTEE’S PROPOSED MODE OF “REDISTRIBUTION” IS NO
FAIRER THAN THAT IMPOSED BY THE “GENERAL RULE.”
The Trustee posits that eschewing the “general rule” and subscribing to his
proposed mode of redistribution is the more equitable approach. PBr. at p. 11. In
essence, the Trustee argues that his redistribution scheme is more fair because, in
his view, “it levels the playing field” for all defrauded investors. Not only does
this facile redistribution scheme fly in the face of decades of established law,15 but
there is simply no way to establish that the Trustee’s method produces a fairer
result.
15
A fact not lost on the Bankruptcy Court which considered and dismissed theseeming elegance of the Trustee’s redistribution model, holding to the“general rule” and finding no “sound basis . . . for creating a different rulebased on the equity nature of the fraudulently induced investments.” Doc. 38at p. 13.
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Under the Trustee’s proposed scheme, the playing field is not leveled; there
will still be “winners” and “losers” as there are under the “general rule,” divided by
an arbitrary moment in time where, on one side, some defrauded investors retain
some portion of their redemptions while others are subject to avoidance and
recovery. The Trustee’s scheme does not, and cannot, eliminate the divide
between winners and losers. It only shifts the arbitrary moment in time dividing the
two groups.
The Trustee's approach is no more fair, and may be less fair, than the current
system (applying the “general rule”). For example, one only need to consider the
effect of the application of the statute of limitations pursuant to the applicable
fraudulent conveyance provisions of the Bankruptcy Code. See 11 U.S.C. §
548(a)(1) (a trustee may only avoid transfers “made or incurred on or within 2
years before the date of the filing of the petition”).
Given the statute of limitations, earlier investors in a Ponzi scheme, whose
redemptions cannot be clawed back because they were received outside the period
circumscribed by the statute of limitations, will retain their entire redemptions and
false profits, while those defrauded investors whose redemptions were received
within the statutory “look back” period are subject to avoidance actions. The
Trustee’s proposed redistribution scheme, without any basis in law, arbitrarily
imposes a burden on a new group of innocent investors while failing to address the
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impact of the redistribution to the “ones that got away.” The innocent defrauded
investors whose redemptions occurred closer to the operative petition date will be
made to bear the very burden the Trustee purports to seek to eradicate; paying the
freight for other investors who are allowed to keep all of their distributions from
debtors simply by dint of good fortune and timing of redeeming outside the statute
of limitations.
Additionally, there is no certainty that the Trustee’s proposed arbitrary
redistribution scheme would provide any increased benefit to creditors. The
arbitrary scheme would no doubt invite significant litigation with the attendant
administrative costs. These costs would be incurred in pursuing claims against
defrauded investors who, in many instances are or may be incapable of paying
funds back to the Estate because they do not have the resources to do so. The
Trustee’s proposed scheme would cause uncertainty, provoke litigation and
provide little real hope of realizing any additional dividend for creditors because
the administrative costs would actually cause a dilution of estate assets.
Where, as here, there is little or nothing in the Estate to distribute to
investors, how is it “more fair” to claw back redemptions, especially when some
Defrauded Investor/Defendants are judgment proof and will have nothing to return
to the Estate? And where some Defrauded Investors/Defendants will have to pay
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and others will not? Like many utopian ideas, the Trustee’s proposal collapses in
the face of practical challenges.
Where, as in the present matter, all investors are innocent victims, they
ought, as the “general rule” holds, to be left as they were at the time that the fraud
was exposed. Any other result is an artificial plan of redistribution, plain and
simple. See Johnson, 619 F.Supp. at 1350. The Trustee’s proposed approach is no
more elegant, and no fairer, than the system of rules imposed by the Bankruptcy
Code, the rules of Civil Procedure and simple notions of fairness imbedded in due
process. What the Trustee proposes is to supplant a redistribution scheme that is
framed by statute, rules and a long-standing general rule of law with a more
arbitrary system that is based on none of those certainties. There is nothing
inherently “more fair” about the Trustee’s redistribution scheme.
E. THE TRUSTEE’S ARGUMENT IS PRECLUDED BY THE DOCTRINES OF
RES JUDICATA AND ESTOPPEL.
In addition to the uniform sound precedent underlying the rulings of the
Bankruptcy Court, this Court has other bases on which to uphold a denial of the
Motion for Summary Judgment. See In re Optical Techs., Inc., 246 F.3d at 1334;
see also Hildebrandt v. Ill. Dep't of Natural Res., 347 F.3d 1014, 1032 (7th Cir.
2003) (court of appeals may affirm district court's ruling on summary judgment on
any ground supported by record). The Trustee’s arguments on appeal are
precluded by the res judicata effect of the Trustee’s own confirmed plan of
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liquidation (the “Plan”), as well as by the doctrine of estoppel.16 The confirmed
Plan characterizes the Defrauded Investors as holders of “Investor Tort Claims,” a
defined term in the Plan. See Doc. 6-2. Even without the Plan’s definition, the
meaning of the term is plain on its face; the Defrauded Investors are tort claimants,
in the Trustee’s own words.
Nevertheless, the Trustee continues to urge the Court to find that the
Defrauded Investors be treated as mere equity holders, even though the Plan
mentions nothing about characterizing the Defrauded Investors as equity holders,
nor anything about an “articulation” prerequisite to achieve tort claimant status.
To the contrary, in the Plan and the accompanying Second Amended Disclosure
Statement with Respect to the Trustee’s Plan of Liquidation (the “Disclosure
Statement”), the Trustee expressly “articulates” that the Defrauded Investors are
16 The same principles apply to the positions taken by the Trustee in pursuingpreference claims against the Defrauded Investors in connection with thisbankruptcy. Pursuit of a preferential transfer under Section 547 of theBankruptcy Code requires that the transfer the trustee seeks to avoid andrecover be made on “account of an antecedent debt.” Courts applyingpreference law in the context of Ponzi schemes have held that a defraudedinvestor is a “creditor” holding an “antecedent debt” based on the sameprincipal discussed above that the defrauded investor’s principal investment
gives rise to an immediate claim for rescission or restitution. See e.g. Woottonv. Barge (In re Cohen), 875 F.2d 508, 509 (5th Cir 1989). If the DefraudedInvestors hold “claims” on account of antecedent debt in the Trustee’spreference actions, surely they hold such claims for the purposes of establishing defenses under Section 548(c).
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tort claimants. See Doc. 6-1 and 6-2. The Trustee, having solicited votes for the
Plan, and having obtained an order of the Bankruptcy Court approving that plan,
should not be allowed to change his fundamental position now.
1. The Trustee is barred by the doctrine of res judicata from
claiming that the Defrauded Investors are not debt-holders.
The confirmed Plan sets forth the terms of the liquidation in this case, and
the Trustee is bound by those terms. 11 U.S.C. § 1141(a); see e.g. Eubanks v.
FDIC , 977 F.2d 166 (5th Cir. 1992) (res judicata effect of confirmed plan
precluded debtors from bringing suit against banks on claim that should have been
raised as defense or counterclaim to banks’ proof of claim that was not objected
to); see also First Union Commercial Corp. v. Nelson Mullins, Riley &
Scarborough (In re Varat Enters., Inc.), 81 F.3d 1310 (4th Cir. 1996) (confirmed
plan has res judicata effect).
The Plan expressly states that the Defrauded Investors in these adversary
proceedings hold “Investor Tort Claims.” The term “Investor Tort Claim” is
defined as “Claims of Persons who purchased Interests in one or more of the
Debtors for damages arising from the purchase of such Interests.” Doc. 6-2 at p.
10. The Plan even refers to the Defrauded Investors in some instances as “Investor
Creditors,” and creditors are defined by the Bankruptcy Code as any “entity that
has a claim against the debtor that arose . . . before the order for relief.…” Doc. 6-
2; 11 U.S.C. § 101(10)(A). The Bankruptcy Code in turn defines “debt” as any
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“liability on a claim.” 11 U.S.C. § 101(12). Thus, by recognizing that the
Defrauded Investors hold “tort claims” and are “creditors,” the Plan affirmatively
recognizes that the Defrauded Investors are debt-holders.
The Disclosure Statement offered in connection with the Plan articulates the
Defrauded Investors’ status as tort claimants in order to claim that the alleged
Ponzi scheme was insolvent from its inception. See Doc. 6-1 at p. 32 (“[B]ecause
a Ponzi scheme entity has liabilities based on investor claims against it (though,
here, unasserted prior to IMA’s bankruptcy), that are premised on fraudulent
inducement to invest [a Ponzi scheme is insolvent from its inception.]”). Similarly,
in the Disclosure Statement section titled “Answer to Questions About the Plan”
there is a statement that “[u]nder the Plan, each Holder of an Investor Tort Claim
will have an Allowed Claim in the amount of the outstanding balance of its actual
cash Investment .” Id . at p. 20. (emphasis supplied). To inform the Defrauded
Investors that they will have Allowed Claims in the amounts of their actual cash
investments, and then take the position that the Defrauded Investors’ actual cash
investments were worthless for purposes of Section 548(c) is not only inconsistent
but misleading. The Trustee’s position that the Defrauded Investors’ restitution or
rescission claims do not constitute “value” for purposes of Section 548(c) is
facially at odds with the Plan’s clear characterization of the Defrauded Investors as
tort claimants.
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2. The Trustee is also barred by the doctrine of estoppel from
claiming that the Defrauded Investors are not debt-holders.
The binding effect of the confirmed Plan is reinforced by the fact the Trustee
proposed the Plan and solicited investor Defrauded Investors’ votes for
confirmation. The Trustee should be estopped, therefore, from asserting an
inconsistent position now, after creditors have voted on the Plan and it has been
confirmed by an order of the Bankruptcy Court.
As the Eleventh Circuit has explained, “[j]udicial estoppel is applied to the
calculated assertion of divergent sworn positions. The doctrine is designed to
prevent parties from making a mockery of justice by inconsistent pleadings.”
Burnes v. Pemco Aeroplex, Inc., 291 F.3d 1282, 1285 (11th Cir. 2002) (quoting
Am. Nat’l Bank of Jacksonville v. FDIC , 710 F.2d 1528, 1536 (11th Cir. 1983)).
Courts have applied the doctrine of judicial estoppel to prevent debtors from
taking positions that were not specifically referred to in their confirmed plans. See
Hovis v. General Dynamics Corp. (In re Hovis), 396 B.R. 895 (D.S.C. 2007)
(debtor was precluded on judicial estoppel grounds from bringing breach of
contract claim not listed in confirmed Chapter 11 plan); In re USinternetworking,
Inc., 310 B.R. 274 (Bankr. D. Md. 2004) (judicial estoppel barred debtor from
bringing breach of contract claim not specifically referred to in plan); see also
Southmark Corp. v. Trotter, Smith & Jacobs, 442 S.E.2d 265, 267 (Ga. Ct. App.
1994) (failure to disclose claim in Chapter 11 plan precluded plaintiffs from
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asserting those claims in later state court action); Battle v. Liberty Mut. Fire Ins.
Co., 623 S.E.2d 541, 543 (Ga. Ct. App. 2005) (Chapter 7 debtor that failed to list
house as asset was precluded by judicial estoppel from bringing claim against
insurer to recover damages to property).
More generally, principles of equitable estoppel also apply to preclude the
Trustee from taking a position inconsistent with his confirmed Plan. Equitable
estoppel applies under the following conditions:
The person against whom the estoppel is to apply musthave actual or constructive knowledge of the facts andmust have induced, through his words or conduct,another to rely upon the purported representation. Theparty seeking to assert estoppel must have neitherknowledge or reasonable means or opportunity of obtaining knowledge of the facts and must have reliedupon the other party’s representation to his detriment.
Atlanta Retail, Inc. v. Eastman Kodak Co. (In re Atlanta Retail, Inc.), 294 B.R.
186, 197 (Bankr. N.D. Ga. 2003) (quoting Choat v. Rome Indus., Inc., 462 F. Supp.
728, 730 (N.D. Ga. 1978)).
Here the Plan clearly characterized the Defrauded Investors as tort
claimants. The Defrauded Investors’ votes were solicited by the Trustee based on
the contents of the Plan and Disclosure Statement. The Bankruptcy Court
confirmed the Plan. The Trustee accordingly should be estopped from denying
that the Defrauded Investors are tort claimants by now claiming that they are mere
“equity” holders. Even ignoring the overwhelming body of case law standing
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opposed to the Trustee’s novel theories of fraudulent transfer law, the Trustee’s
Motion should be denied because he is not entitled, given prior positions staked out
in the underlying bankruptcy case, to make it.
V. CONCLUSION
For the foregoing reasons, the Court should affirm the Bankruptcy Court’s
Order finding that the Defrauded Investors, who received redemptions of their
principal investment, received such redemptions “for value” as required to
establish a defense to fraudulent transfer claims under 11 U.S.C. § 548(c) and
O.C.G.A. § 18-2-78(a) or similar state laws.
Respectfully submitted,
/s/ Joshua S. Barlow
/s/ Lee Harrington
/s/ Timothy W. Mungovan____________
Timothy W. Mungovan (Mass. Bar # 600702)
Jonathan Sablone (Mass. Bar # 632998)Lee Harrington (Mass. Bar # 643239)Joshua S. Barlow (Mass. Bar # 667472)NIXON PEABODY LLP100 Summer StreetBoston, MA 02110617.345.1000
Attorneys for Defendants – Appellees George
Russell Curtis, Sr. Living Trust, GeorgeRussell Curtis, Sr. Betty Curtis, David LairdFamily Trust, David Laird, and Deborah H.Laird
Dated: July 1, 2010
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CERTIFICATE OF COMPLIANCE WITH RULE 32(a)
1. This brief complies with the type-volume limitation set forth in Fed.
R. App. P. 32(a)(7), because the brief contains 11,267 words,
excluding the parts of the brief exempted by Fed. R. App. P.
32(a)(7)(B)(iii).
2. This brief complies with the typeface requirements of Fed. R. App. P.
32(a)(5) and the type style requirements of Fed. R. App. P. 32(a)(6)
because this brief has been prepared in a proportionally spaced
typeface using Times New Roman in 14 point font.
/s/ Joshua S. Barlow
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CERTIFICATE OF SERVICE
I hereby certify that on July 1, 2010, I caused to be served a copy of the
foregoing via the Court’s ECF System and/or first class mail on the following
parties.
John W. Mills, Esq.Colin Bernardino, Esq.Counsel for the Trustee,William F. PerkinsKilpatrick Stockton1100 Peachtree St. NE,Suite 2800
Atlanta, GA 30309-4528
Mark S. Kaufman, Esq.Brian E. Bates, Esq.Counsel for Committee of InvestorsMcKenna Long Aldridge303 Peachtree St. NE, Suite5300
Atlanta, GA 30308-3265
Morgan Bradylyons, Esq.Counsel for Amicus CuriaeU.S. Securities andExchange Commission100 F St. NEWashington, DC 20549-8030
Paul M Spizzirri, Esq.Counsel for Willie J. Clay,et al.Spizzirri Law Offices1170 Peachtree St., Suite1200Atlanta, GA 30309
Sharon M. Lewonski, Esq.Counsel for Marco D.ColemanEpstein, Becker & Green,P.C.945 East Paces Ferry Rd.,Suite 2700Atlanta, Georgia 30326
Jonathan H Fain, Esq.Counsel for X-SpurtsInvestment Club of Atlanta,LLC, et al.Jonathan H. Fain andAssoc., PC66 Lenox PointeAtlanta, GA 30324
Robert J. Mottern, Esq.Counsel for James Bronner,et al.Investment Law Group of Gillett,Mottern115 Perimeter Center PlaceSouth Terraces, Suite 170Atlanta, GA 30346
Thomas M. Byrne, Esq.Angela R. Fox, Esq.Counsel for Keith O. Burks,et al.Sutherland Asbill &Brennan LLP999 W Peachtree St., NWAtlanta, Georgia 30309-3819
Sblend A. Sblendorio, Esq.Catosha L. Woods, Esq.Counsel for LawrenceHooper, et al.Hoge Fenton Jones &Appel, Inc.4309 Hacienda Dr., Suite350Pleasanton, CA 94588
Gregory T. Bailey, Esq.
Counsel for Mt. NeboBaptist Life Center, Inc.571 Culberson StreetAtlanta, GA 30310
Christopher D. Phillips,
Esq.Counsel for DavidWisneski, et al.Lamberth, Cifelli, Stokes &Stout, P.A.3343 Peachtree Rd. NE,Suite 550Atlanta, GA 30326-1428
Kevin A. Stine, Esq.
Joshua Tropper, Esq.Counsel for Erich G.Randolph, et al.Baker, Donelson, Bearman,Caldwell & Berkowitz, P.C.3414 Peachtree Rd. NEAtlanta, GA 30326-1153
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Valerie Peoples3320 Hagger WayEast Point, GA 30344
Heather D. Brown, Esq.Mark A. Kelley, Esq.Counsel for Martin D.Jeffries
Kitchens, Kelley, Gaynes,P.C.3495 Piedmont Road NE,Suite 11-900Atlanta, GA 30305-1755
William R. Lester, Esq.Counsel for Dexter M.Page, et al.Fryer, Schuster & Lester,
P.C.1050 Crown Pointe Pkwy.,Suite 410Atlanta, GA 30338
James K. Knight, Jr., Esq.Counsel for Annette K.Bond401 Atlanta St.
Marietta, GA 30060
/s/ Joshua S. Barlow
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EXHIBIT A
Schedule of Joining Defrauded Investors
Willie J. Clay, Rayshawn Francis Clay, Cartopia, LLC, Decko Quality Services,
LLC, Clay Real Estate Holdings, Inc. (07-06156)
Marco D. Coleman (07-06285)
X-Spurts Investment Club of Atlanta, LLC, John L. Carter, Dexter M. Page,
William L. Hutchinson, Jr., Ricardo A. Arzu, and Phillip E. Hadley (07-06287)
David Wisneski (08-06099)
Keith O. Burks (08-06113)
Michelle Peoples-Wisneski (08-06128)
Annette K. Bond (08-06130)
Cornell Shelton (08-06154)
Valerie Peoples (08-06162)
Atlanta Perinatal Associates, P.C., Syretha Andrews, Alicia Dorsey, Carol Grone,
Dexter M. Page, Bradford Bootstaylor (08-06185)
Gregory Hooper (08-06187)Lawrence Hooper (08-06188)
SyTBC Capital, Inc. (08-06191)
Mt. Nebo Baptist Life Center, Inc. (08-06206)
George Russell Curtis, Sr. Living Trust, George Russell Curtis, Sr., Betty Curtis
(08-06215)
LaVerne Jones (08-06221)
Erich G. Randolph (08-06239)
David Laird Family Trust, David Laird, Deborah H. Laird (08-06225)
James Shelton, III (08-06232)
James Shelton (08-06234)
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Martin D. Jeffries (08-06241)
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