Unpublished Disposition, 936 F.2d 577 (9th Cir. 1991)

MEMORANDUM^* 

FPI Nursery Partners 1984-I (FPI) appeals the district court's grant of summary judgment in favor of the bankruptcy trustee, Thomas Hayes.

FPI's appeal was consolidated with the appeal of Richard J. Blumer and Gregory H. Schwab, which arose out of the same judgment. On appeal, FPI stipulated that the briefs of Blumer and Schwab would be deemed filed in FPI's own appeal.

On January 10, 1991, we filed our memorandum disposition in which we disposed of the issues raised in this appeal and in the Blumer and Schwab appeal. See Thomas E. Hayes, Trustee, Plaintiff-Appellee v. FPI Nursery Partners 1984-I, a Hawaii limited partnership, et al., Defendant, and Richard J. Blumer; Gregory H. Schwab, Defendants-Appellants, No. 89-16502 (9th Cir. Jan. 10, 1991).

However, that disposition did not specifically refer to the number of FPI's appeal and the body of the disposition does not make it clear that we were disposing of FPI's claims. We were.

Therefore, the district court's judgment in this case is hereby affirmed for all of the reasons stated in the memorandum disposition heretofore filed in Case No. 89-16502 on January 10, 1991. For convenience of reference, a copy of that disposition is attached to this memorandum and is marked "Attachment A."

AFFIRMED.

ATTACHMENT A.

Thomas E. Hayes, Trustee, Plaintiff-Appellee,

v.

FPI Nursery Partners 1984-I, a Hawaii limited partnership,

et al., Defendant,

and

Richard J. Blumer, Gregory H. Schwab, Defendants-Appellants.

No. 89-16502

Filed January 10, 1991

MEMORANDUM^* 

Richard Blumer and Gregory Schwab appeal the district court's grant of summary judgment in favor of the bankruptcy trustee, Thomas Hayes. Blumer and Schwab assert they should not have to disgorge limited partnership distributions they received from FPI Nursery Partners 1984-I ("FPI 1984-I"), although the distributions are traceable to fraudulent transfers under an elaborate Ponzi scheme. Alternatively, Blumer and Schwab argue that the district court's prejudgment interest award was improper.

We affirm.

BACKGROUND FACTS

Blumer and Schwab purchased limited partnership interests in FPI 1984-I in 1984. FPI 1984-I is a registered Hawaii limited partnership which has complied with all statutory requirements. Subsequently, FPI 1984-I entered a Consulting and Marketing Agreement with Agricultural Research and Technology Group, Inc. ("Agretech"), a registered Hawaii corporation. As part of the agreement, FPI 1984-I transferred all its assets to Agretech.

Agretech purported to pool money from investors like FPI 1984-I, use the funds to cultivate and raise plants, and sell the plants at a profit. Agretech contracted to then distribute pro rata shares of the profits to the investors.

Instead, Agretech worked an elaborate Ponzi scheme. Agretech took money from later investors and transferred it to earlier investors. Those transfers established a track record of profitability to attrach even more investors.

Beginning in December 1985, Agretech transferred money to FPI 1984-I pursuant to the fraudulent Ponzi scheme. At the time, the general partner of FPI 1984-I at least suspected the transfer was fraudulent and not the result of plant sale profits. FPI 1984-I in turn made distributions to its limited partners, including Blumer and Schwab. It is undisputed that Blumer and Schwab had no notice that the money they received was a fraudulent transfer.

Agretech eventually went into bankruptcy. Trustee Hayes sought to avoid and recover the fraudulent transfers made under the Ponzi scheme. Hayes moved for summary judgment and won on both state and federal law grounds. Hayes also received a prejudgment interest award, with interest accruing from the date of the transfers at a fixed rate.

Blumer and Schwab appeal the summary judgment order. They assert that all theories upon which Hayes can recover their funds depend on FPI 1984-I's existence as a separate entity, and that in reality FPI 1984-I is a mere fiction or conduit of Agretech. Alternatively, Blumer and Schwab challenge the pre-judgment interest award.

JURISDICTION AND STANDARDS OF REVIEW

We have jurisdiction pursuant to 28 U.S.C. § 1291.

We review de novo the district court's order granting summary judgment. T.W. Elec. Serv., Inc. v. Pac. Elec. Contractors Ass'n, 809 F.2d 626, 629 (9th Cir. 1987). We review a district court's pre-judgment interest award for abuse of discretion. Western Pac. Fisheries, Inc. v. SS President Grant, 730 F.2d 1280, 1288 (9th Cir. 1984).

DISCUSSION

Summary judgment is appropriate only if there are no triable issues of material fact, and the moving party is entitled to prevail as a matter of law. Fed. R. Civ. P. 56(c). All evidence and reasonable inferences must be viewed in the light most favorable to the non-moving party, but a mere scintilla of evidence will not suffice. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 106 S. Ct. 2505, 91 L. Ed. 2d 202 (1986). The substantive law determines which facts are material. Id. at 248, 106 S. Ct. at 2510.

Trustee Hayes asserts three alternative, independent grounds under which he can recover the funds FPI 1984-I transferred to the appellants. As explained below, all theories depend on FPI 1984-I's existence as a legitimate limited partnership, which was a separate entity from Agretech. Therefore, we review whether the district court was presented with any triable issues of material fact regarding FPI 1984-I's separate existence.

B. Avoidance and Recovery of Fraudulent Conveyances

Under 11 U.S.C. § 548(a) (1), a bankruptcy trustee may avoid a transfer of funds by a bankruptcy debtor with the intent to hinder, delay, or defraud creditors, if the debtor transferred the funds less than a year before bankruptcy was filed. Similar provisions are found in Hawaii state law and common law.¹  All elements are met in this case.

An exception to the above rule exists when the recipient of an otherwise voidable transfer takes in good faith and for value. 11 U.S.C. § 548(c); Haw.Rev.Stat. Sec. 651C-8(a). This exception does not apply in this case. FPI 1984-I itself did not take in good faith, and the limited partners as subsequent transferees did not take for value. See, In re Agricultural Research and Technology Group, Inc. v. Palm Seedlings Partners-A, No. 89-15416, slip op. 12707, 12727-32 (9th Cir. Oct. 10, 1990).

However, if Blumer and Schwab were permitted to show that FPI 1984-I's existence as a limited partnership should be set aside and that FPI 1984-I is part of Agretech, they could be considered direct investors, though not equity holders, in Agretech. As such, they would be considered contractual creditors who gave value in exchange for the funds they received from Agretech. See, e.g., In re United Energy Corp., 102 B.R. 757, 760-63 (BAP 9th Cir. 1989). Since it is undisputed that Blumer and Schwab acted in good faith, the avoidance exception would apply, and Hayes could not recover the funds Agretech transferred to Blumer and Schwab.

C. Avoidance and Recovery of Preferential Conveyances

Under 11 U.S.C. § 547(b), a trustee may avoid any transfer of a debtor's interest in property:

(1) to or for the benefit of a creditor;

(2) for or on account of an antecedent debt;

(3) made while the debtor was insolvent;

(4) made between 90 days and one year before the date bankruptcy was filed if the creditor was an insider; and

(5) which enabled the creditor to receive more than it would have under usual bankruptcy proceedings.² 

If FPI 1984-I is a true limited partnership, none of the above factors are in dispute. However, if FPI 1984-I's existence is treated as a fictional emanation of Agretech, this preferential transfer theory fails. If appellants effectively invested directly in Agretech, and Agretech effectively transferred payments directly to appellants, there is no insider status as defined in the code. Thus, the transfers would have to have been within 90 days of filing bankruptcy under 11 U.S.C. § 547(4) (A), and they were not.

Under the Uniform Limited Partnership Act, adopted in Hawaii, a limited partner remains liable for all partnership debts up to the amount of that limited partner's contribution. Former Haw.Rev.Stat. Secs. 425-36(a) (1), 425-37.³  Therefore, Blumer and Schwab can avoid liability under state limited partnership law only by showing that FPI 1984-I was not truly a limited partnership.

E. FPI 1984-I's Existence as a Limited Partnership

As discussed above, summary judgment in favor of Hayes depends on FPI 1984-I's existence separate from Agretech under all three theories. Generally, limited partnerships are creatures of statute, and statutory compliance establishes their existence. See, e.g., Dwinnell's Cent. Neon v. Cosmopolitan Chinook Hotel, 21 Wash. App. 929, 587 P.2d 191, 194 (1978). In the present case, neither party asserts that FPI 1984-I failed to comply with the statutory requirements of former Haw.Rev.Stat. Sec. 425-21 et seq.

Even so, Blumer and Schwab ask us to disregard the limited partnership's existence on equitable grounds, and to then collapse FPI 1984-I into Agretech. Although research has revealed no cases denying the existence of a limited partnership on grounds other than failure to comply with a statute, we recognize that bankruptcy courts are courts of equity. As such, they can "look through the form to the substance of any particular transaction and may contrive new remedies where those in law are inadequate...." In re Global W. Dev. Corp., 759 F.2d 724, 727 (9th Cir. 1985) (citations omitted). Appellants suggest that a holding that every limited partnership which complies with a statute is conclusively an independent entity would violate this equitable spirit. They ask us to use our equitable powers to dismantle the formal structures which separate Agretech from the limited partnership and its partners. They would then have us determine that the partners are simply victim creditors of Agretech itself.

Appellants suggestion is interesting, even intriguing. However, in the context of this case we need not decide whether on occasion it would be proper to disregard the formal separateness of certain organizations in order to do equity. Cf., In re United Energy Corp., 102 B.R. at 763-64. We need not do so because it is clear that what appellants ask us to do would not yield an equitable result.

What appellants effectively ask us to do is to allow them to keep their Ponzi scheme distributions based upon their fortuitous status as early investors in the scheme, and to leave the later investors holding the bag. That would be inherently unfair, because all of the victims of Agretech's Ponzi scheme are equally innocent and should be treated the same, if legally possible. See Cunningham v. Brown, 265 U.S. 1, 13, 44 S. Ct. 424, 427, 68 L. Ed. 873 (1924) (Ponzi scheme victims who beat other victims to the bank to recoup their money obtained unlawful preferences and violated the spirit of creditor equality); United Energy, 102 B.R. at 763.

Although in some circumstances courts have allowed Ponzi scheme victims to keep transferred funds if they exchanged value for the funds, those cases involve victims with clear-cut status as creditors. See, e.g., United Energy, 102 B.R. at 764; Eby v. Ashley, 1 F.2d 971 (4th Cir. 1924), cert. denied, 266 U.S. 631, 45 S. Ct. 197, 69 L. Ed. 478 (1925) (holding that investors who purchased securities contracts gave value for subsequent Ponzi scheme payments, and trustee could recover profits only, rather than returned principal); In re Independent Clearing House Co., 77 B.R. 843 (D. Utah 1987) (holding that investors who purchased fictitious accounts receivable contracts gave value, and trustee could not recover subsequent Ponzi scheme payments).

In this case, we would have to invoke equitable powers in order to disregard the limited partnerships and elevate appellants to creditor status. It would be incongruous to invoke equity when it would achieve an inequitable result, and we decline to do so. A bankruptcy court has a duty to "sift the circumstances surrounding any claim to see that injustice or unfairness is not done in administration of the bankrupt estate." Pepper v. Litton, 308 U.S. 295, 308, 60 S. Ct. 238, 246, 84 L. Ed. 281 (1939). Cf., Matter of B & W Enters., Inc., 713 F.2d 534, 537-38 (9th Cir. 1983) (refusing to elevate claims of one creditor over claims of other creditors in the same class, absent misconduct by the other creditors).

In fine, appellants ask that we disregard the fact that they sought to become equity holders in a partnership and to reap the benefits that equity holders can generally gather. They ask us to do so for the purpose of preferring them over the other victims of Agretech. While they argue equity, they have failed to demonstrate that we would be doing equity were we to strain to elevate them to a position higher than that of Agretech's other investor-victims.

They have failed because, as the Supreme Court said in considering the claims of victims of the infamous Mr. Ponzi himself: "It is a case the circumstances of which call strongly for the principle that equality is equity, and this is the spirit of the bankrupt law." Cunningham v. Brown, 265 U.S. at 13, 44 S. Ct. at 427.

The district court applied Hawaii law and awarded pre-judgment interest to Hayes as of the date when Blumer and Schwab received their partnership distributions. That was proper. Palm Seedlings Partners-A, 916 F.2d at 541-42.

The district court also awarded pre-judgment interest at a fixed rate without allowing for fluctuations in the market rate. That was not an abuse of discretion, since Hawaii law makes no allowance for fluctuations. Haw.Rev.Stat. Sec. 478-3 (supp. 1989).⁴ 

CONCLUSION

As this case shows, Ponzi schemes are protean, for the inventiveness of the human mind makes permutations in their form virtually infinite. It also demonstrates the perfectly human desire to rescue what one can for oneself, without great concern for other sufferers. We hold that equity will not lend itself to the fulfillment of that desire. Rather, it will attempt to treat the sufferers equally. Thus, we decline to permit the use of equitable principles to disregard the formal separation between the limited partnership and the corporation involved in this scheme. Here, equality is equity.

AFFIRMED.