In re Raejean S. Bonham dba World Plus
Bankruptcy No. F95-00897
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Bound copies of the complete motion and all exhibits will be mailed to all BRA Counsel. A limited number of copies of the bound memorandum and all exhibits are available for checkout by pro se BRA defendants from Bundy & Christianson, Guess & Rudd and Larry Compton during regular business hours.

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Cabot Christianson, Esq.
BUNDY & CHRISTIANSON
911 W. 8th Avenue, Suite 302
Anchorage, AK 99501
(907) 258-6016

Attorneys for Trustee

In Re:	)
RAEJEAN BONHAM, aka JEAN BONHAM, aka	)
JEANNIE BONHAM dba WORLD PLUS	) Bankruptcy No. F95-00897-HAR
Debtor.	)
	)
	)
In Re:	)
BONHAM RECOVERY ACTIONS, a proceeding to	) Case No. F95-00897-168 HAR
jointly administer certain pre-trial and trial issues in	) Bancap No. 96-4281
numerous related adversary proceedings.	)

 

This memorandum supports the motions of Plaintiff, Larry Compton, Trustee, for partial summary judgment on the trustee's preference and fraudulent conveyance claims asserted in the individual adversary actions being jointly administered as part of the Bonham Recovery Action (BRA) pending in this court. Specifically, the trustee requests:

(1) Summary judgment that the debtor operated a Ponzi scheme;

(2) Summary judgment that all payments to BRA defendants within 90 days of the petition (or one year for insiders) are voidable preferences within the meaning of Section 547(b);

(3) Summary judgment that, with the exception of Section 547(c)(4) [subsequent new value] none of the defenses contained in Section 547(c) apply to the trustee's preference cause of action;

(4) Summary judgment that all payments made by the debtor after December 19, 1994 are avoidable under Section 548(a)(1), subject to such defenses as may be available under Section 548(c);

(5) Summary judgment that all of debtor's payments after December 19, 1989 are avoidable under AS 34.40.010 or Alaska common law, subject to such defenses as may be available under AS 34.40.110 or Alaska common law; and

(6) Rule 54(b) summary judgment, against certain BRA defendants, in an amount equal to the greater of (a) their avoidable preferences; and (b) their net gains, as detailed in Exhibit 1 to the Affidavit of Gary Spraker ("Spraker Affidavit"), filed herewith.

The trustee's motion, and this memorandum, applies to all the BRA defendants. With respect to BRA defendants that have received preferences, or who are net gainers, this motion is supported by a separate damages affidavit filed in each individual BRA adversary action which sets forth the amount of the preference or net gain, and the computation utilized by the trustee to arrive at the amount of the net gain. Attached to the Spraker Affidavit as Exhibit 1 is a chart which summarizes the affidavits which have been filed to date in the individual BRA actions seeking Rule 54(b) judgments totaling $16,790,117.

Pivotal to the relief sought in this motion is a determination that the debtor operated a Ponzi scheme in which she used later investors' money to pay earlier investors. Although this determination requires a distillation of thousands of transactions, this court can confidently conclude from undisputed facts that as a matter of law that the debtor operated a Ponzi scheme. Two experts with substantial experience evaluating Ponzi schemes - Alan Funk, the Securities and Exchange Commission's expert witness in Securities and Exchange Commission v. Bonham et al, F96-0023 Civ. (HRH) (D. Alaska), and Jayne MacPhee - the trustee's expert in this litigation, have concluded that the debtor operated a Ponzi scheme. The Declaration of Alan Funk submitted for the SEC action is attached to the Spraker Affidavit as Exhibit 2. Judge Holland has recently ruled in the SEC litigation that the debtor's "'investment program' was a Ponzi scheme; defendants used investor funds primarily to repay other investors when their World Plus and Atlantic 'contracts' became due." This court should reach that same conclusion.

I. FACTS

A. The Debtor's Ticket Business

1. Debtor's business records

2. Bank Records

3. Debtor's Business Records and her Bank Records

Table 1 - Summary of availability of debtor's business records and bank records

B. Gross profitability of Debtor's ticket sales, according to her business records

Table 2 - Debtor's gross profit according to her business records

C. Calculating the Debtor's Net Profit

1. Debtor's actual cost of goods sold

Table 3 - Ticket COGS: per bank records v. per debtor's business records

2. Debtor's travel-related G&A

Table 4 - Summary of travel-related G&A

3. Debtor's personal draws

Table 5 - Debtor's personal draws and credit card expense

4. Debtor's ticket operation operated at a loss every year since 1988

Table 6 - Debtor's profits (losses) from her ticket operation, MacPhee Affidavit Exhibit E

D. The Debtor's Investment Program

Table 7 - Investment revenue as a percentage of total revenue (MacPhee Affidavit Exhibit F)

E. Solvency and Debtor's Summarized Balance Sheet - MacPhee Affidavit, Exhibit H

II. ARGUMENT

A. The Debtor Operated a Ponzi Scheme

Table 8 - Debtor's Use of Funds Deposited Comparison of Ticket Purchases versus Total Deposits

B. Debtor's Ticket Business Does Not Legitimize the Ponzi Scheme

C. The Trustee Is Entitled to Final Judgment on His Preference Claims

1. The Elements of Preference in Section 547(b) Are All Established as a Matter of Law

2. With the Exception of Section 547(c)(4) [Subsequent New Value], There Are No Defenses to the Trustee's Preference Cause of Action.

D. Defendants' Receipt of Payments from the Debtor's Ponzi Scheme Establishes Section 548(a)(1) Fraudulent Intent as a Matter of Law

E. Defendants' Receipt of Payments from the Debtor's Ponzi Scheme Establishes Fraudulent Intent as a Matter of Law for Trustee's State Law Fraudulent Conveyance Claims

1. The Trustee Meets the Requirements of ß544(b)

2. The Debtor's Operation of a Ponzi Scheme Compels Summary Judgment on the State Fraudulent Conveyance Claims

F. Summary Judgment on Liability and Damages Is Appropriate for Anyone Who Was a Net Gainer

1. Net Gainers Cannot Establish Value under ß548(c)

2. The same result must occur under Alaska law

G. Rule 54(b) Final Judgment is Appropriate on the State and Federal Fraudulent Conveyance Claims

1. The trustee has sued multiple parties on multiple claims

2. Partial Summary Judgment on the Preference and Net Gainers is Final for Purposes of Rule 54(b)

3. There is No Just Reason to Delay Appeal

CONCLUSION

Raejean Bonham's business operation had two separate sides, one being the sale of frequent flyer tickets and the other being her investment program. The sides were distinct, but related: a key element of Raejean's sales pitch for her investment program was that her frequent flyer ticket sales were so profitable that she could afford to pay exorbitant interest rates on the funds she borrowed from her investors. In reality, her own records, and those obtained from her bank accounts, establish that the ticket business could not even pay its own operating expenses, much less the staggering investment debt she incurred. Since the "business" never generated any money, the only way the debtor could pay her investors was to use incoming investments.

A. The Debtor's Ticket Business

Raejean told prospective investors that she purchased frequent flyer miles in bulk from Fortune 500 corporations such as IBM, Apple, Sony, Magnavox, Hewlett Packard, and Xerox, which she was then able to sell in ticket form at huge markups.

MR. FRANK: You -- you buy outstanding miles that somebody has earned --

JEANNIE: No.

MR. FRANK: -- in the marketplace?

JEANNIE: No. We buy miles strictly from corporations. I buy miles from Magnavox, Sony, IBM and Apple and General Electric. I've been buying miles from IBM, Magnavox, Apple and Sony for four years. They're on a three year contract with me.

MR. FRANK: Okay. So --

JEANNIE: All Right? And they -- those miles are being paid back at 20 percent to the investors on a 6 month contract.

MR. FRANK: Okay. But -- but you make your money by buying the miles at a discount and then using -- converting those miles into ticket; is that correct?

JEANNIE: That's correct; right.

Exhibit 1 to the Declaration of Noelle Martinez (Spraker Affidavit, Exhibit 5); see also Deposition of Tim Kellis, p. 17 (sale of cruise miles supported 50% contracts) (Spraker Affidavit, Exhibit 6).. Affidavit of Larry Compton (Compton Affidavit), 8. These tales of huge markups on tickets purchased from Fortune 500 corporations were pure, unadulterated lies. Representatives of Hewlett Packard, SONY, Apple, and IBM have testified in depositions in the SEC litigation that their companies do not accumulate frequent flyer miles as corporations; do not sell frequent flyer miles; nor have they heard of Raejean Bonham. The trustee has not found any written contracts in the debtor's records for the purchase of airline mileage with Magnavox, Sony, IBM, Hewlett-Packard or Apple Computer. Id. Nor has he found any inventory of frequent flier mileage. Id.

Sworn testimony of Raejean's employees, and Raejean's business records, paint the true picture. A World Plus customer wanting to fly on a frequent flyer ticket would contact World Plus with the dates and destination. World Plus would call Delta Airlines directly (or another carrier) and make a reservation for their customer. The customer paid World Plus' full purchase price, typically around $550 for a coach ticket but sometimes less, in advance before World Plus would order the ticket. Together with a receipt for the ticket payment, the customer was also required to sign a "consent form" informing the customer that he or she would receive a frequent flyer ticket and would be assigned a fictitious relationship to the person supplying the frequent flyer miles. Compton Affidavit 10, Exhibit 3.

World Plus would then place the order with a wholesale frequent flyer ticket broker, pay half the ticket price, and enter the order in one of several "broker books" which kept a record of all sales made through the particular wholesale ticket broker. The wholesale ticket broker would then supply the ticket, the name of the frequent flyer whose miles had been used to issue the ticket, and the fictitious family relationship between World Plus' customer and the wholesaler's frequent flyer. World Plus paid the other half of the ticket price upon receipt of the ticket. [Bonham deposition, p. 11; Spraker Affidavit, Ex. 14]

Exhibit 5 to the Affidavit of Larry Compton, Trustee, is a tabulation of the total numbers of tickets sold by debtor, as disclosed by the broker book summaries and the file for 1995. According to that tabulation debtor sold 9,350 round trip tickets from 1988 to 1995.

1. Debtor's business records.

Raejean kept track of her ticket sales in her broker books, and monthly summary sheets created from those broker books. At the end of a month, Raejean would gather the broker notebooks, remove the pages for the month and then create summary sheets listing each ticket user, the amount paid for the ticket, and World Plus' cost of the ticket, to determine her gross profit for the month. A summary sheet for the month of January 1994, is attached as Compton Affidavit Exhibit 4. Importantly, the broker books, and the monthly summaries, organized ticket sales according to the month the ticket was flown, not the month that the ticket was ordered or paid for.

The trustee has located the debtor's summary sheets and the accompanying broker book sheets for 1988-1992, 1994, and January 1995. Compton Affidavit, Par. 14. Similar records for 1993, or the remainder of 1995 after January, have not been located. Id.

2. Bank Records

Analysis of debtor's finances would have been vastly simplified if debtor had maintained a reliable set of financial records, but she did not. Debtor did not maintain internally generated profit and loss statements or balance sheets of any sort or description that purport to be reconciled to cash. Compton Affidavit, Par. 27. The last federal income tax return filed by Raejean Bonham individually was apparently for 1991. Id. at Par. 23. The corporations, World Plus, Inc. and Atlantic Pacific Funding Corporation, apparently never filed tax returns. Id. at Par. 24. Accordingly, in order to determine the true volume and nature of the debtor's ticket business and investment program, the trustee was forced to reconstruct debtor's financial records from scratch.

The trustee's reconstruction of debtor's financial records was a huge undertaking and is described in detail in the Affidavit of Larry Compton and the Affidavit of Carleen Mangold. Essentially, the trustee recovered all bank statements from 1988 through 1995 for all of debtor's bank accounts, and entered onto a Quicken database each transaction shown on those bank statements.

With only a few exceptions, the trustee has been able to reconstruct each of debtor's disbursements from January, 1988 through to the petition date. Compton Affidavit, Par. 34, See also MacPhee Affidavit, Par. 9. In most cases, the identity of the person receiving payments was readily determinable by examining debtor's canceled checks, although in some instances, e.g. when the debtor paid by cashier's checks, additional investigation was necessary. Mangold Affidavit. Par. 10.

Deposit detail - that is, the source and purpose of funds deposited into one of the debtor's accounts - was more difficult to reconstruct. Deposit detail was developed from deposit slips, when available; from debtor's check registers, when available; from information subpoenaed from debtor's banks; and from information recovered from the federal government by court order. Mangold Affidavit, Par. 6-12. The trustee has essentially complete deposit detail for 1988, part of 1990, and 1992-1995. Id. at Par. 6. Deposit detail is incomplete or lacking altogether for 1989, part of 1990, and 1991. Id.; Compton Affidavit, Par. 33.

3. Debtor's Business Records and her Bank Records.

Debtor's business records do not exist for every year between 1988-1995. Nor are her bank records complete for all years. To summarize the available business records and bank records of the debtor:

Despite the gaps in the underlying records of the debtor, there is sufficient information to establish as a matter of law that the debtor lost money on her ticket business, even if all reasonable inferences arising from these gaps in the record are drawn in favor of the BRA defendants.

B. Gross profitability of Debtor's ticket sales, according to her business records.

Debtor's business records contain the debtor's calculation of gross profit and show that, according to her own calculations, she was selling the frequent flier tickets for barely more than her cost to purchase them, before deducting any expenses to run her business.

MacPhee Affidavit, Exhibit D.

While gross profit ranging from 2.76% to 16.83% does presage the eventual conclusion that the ticket business operated at a loss, it is also necessary to determine the debtor's annual general and administrative expenses to confirm the unprofitability of debtor's ticket operation.

C. Calculating the Debtor's Net Profit

Though the debtor's records provide insight into the debtor's gross profit, those figures must be adjusted to take into account the debtor's actual business operating expenses to determine her actual net profit. Debtor's business records do not attempt to capture any expense other than the COGs. The remainder of the operating expenses can be developed only from the debtor's reconstructed bank records. The trustee, therefore, has reviewed the bank records to calculate the debtor's actual revenues, cost of goods, and expenses, to determine the debtor's net profit or loss.

1. Debtor's actual cost of goods sold

Interestingly, debtor actually spent more to purchase her airplane tickets than her business records reflect. Debtor's cost of goods, the frequent flier tickets (COGs), according to her business records, is readily derivable by adding up the monthly totals of the individual tickets as calculated in debtor's broker books and monthly summaries. See Compton Affidavit, Exhibit 4; MacPhee Affidavit, Exhibit D. The debtor's actual payments to purchase frequent flier tickets, according to her bank records, are readily derivable by adding up the total payments to known ticket brokers. Compton Affidavit, Par. 36. However, debtor's actual COGs, according to her bank records, are somewhat higher (0% to 18%, depending on the year) than her COGs as determined from her business records.

Some of this disparity is explained by the fact that the debtor's records organized COGs according to the month the customer flew, whereas the bank records show COGs based upon the time debtor purchased the ticket. MacPhee Affidavit, 14. If a customer ordered tickets several months in advance, as was frequently the case, the two methods of determining COGs would differ from each other. However, this timing differential is not sufficient to fully account for the two methods of determining COGs. Id.

There are a number of other possible explanations for the fact that debtor's COGs for her tickets was higher than the COGs as reported on her contemporaneously generated business records: perhaps debtor purchased tickets and then gave them away; perhaps she sold them for cash and did not deposit the cash. However, the trustee's calculations of the payments to the ticket suppliers are from canceled checks to known ticket brokers and therefore should be considered reliable. See MacPhee Affidavit, Par. 12. Thus, the fact remains that the debtor paid more for tickets than she recorded on her ticket summaries.

Jayne MacPhee, the trustee's Ponzi scheme expert, has resolved the question surrounding the higher actual COGs, and the missing deposit detail, in the BRA defendants' favor. For purposes of this motion, she has assumed based on the higher COGs per the debtor's bank records, that the debtor's business records understate her actual ticket sales. MacPhee Affidavit, 14. To determine the debtor's ticket sales, she has assumed that the difference between actual COGs and reported COGs represents tickets sold that were not reflected in her business records. Id. To determine the debtor's gross sales, MacPhee has assumed that the debtor's profit margin percentage for these additional tickets is the same as for her reported tickets. Id. For the years where the business records are not available, MacPhee has averaged the gross profit margin percentage from the nearest available years. Id. at 13 see also MacPhee Affidavit Exhibit E. MacPhee applied these margins to the debtor's actual COGs to arrive at her calculation of the debtor's gross ticket revenues. Id. at Par. 15. The results are reported at MacPhee Affidavit Exhibit E. These assumptions may not precisely duplicate reality, and very possibly overstate the debtor's ticket revenues. But, they do favor the defendants more than any other set of assumptions that has any basis in reality.

2. Debtor's travel-related G&A.

The debtor did not maintain any records for her G&A expenses. The reconstructed bank records are the only source of this information. The items comprising the debtor's travel G&A include: rent, wages, taxes, utilities, postage, and other office related expenses. Compton Affidavit, Par. 31, and Compton Exhibit 13; Mangold Affidavit, Par. 26. The debtor's G&A expanded on a regular basis until the end when she stopped paying for ticket purchases and operating costs altogether:

Compton Affidavit, Exhibit 13, pp. 16-53.

3. Debtor's personal draws

Although the debtor's travel and investment expenses account for the lion's share of disbursements from the debtor's bank accounts, the debtor liberally used World Plus funds to support herself and her family. These payments are categorized in the debtor's reconstructed finances as "Owner's Draws - World Plus." Compton Affidavit, Par. 31, and Compton Exhibit 15; Mangold Affidavit Par. 30. The debtor paid insurance premiums, utilities, purchased vehicles for family members and paid her daughter's rent and college tuition from World Plus accounts. Compton Affidavit, Par. 35; Exhibit 15. Additionally, the debtor made considerable payments for credit card charges. Compton Affidavit Exhibit, Par. 17. The trustee has not allocated the individual credit card purchases in the reconstructed database. Compton Affidavit, Par. 31; Mangold Affidavit, Par. 32. However, both the disbursements categorized as "Owner's Draw" and the credit cards are either travel expenses which directly affect the business' profitability, or personal expenses which depleted the funds available to pay investors. MacPhee Affidavit, Par. 15. On average, the debtor removed approximately $200,000 per year from World Plus accounts through credit card payments and owner's draws:

Compton Affidavit Exhibits 15 and 17.

4. Debtor's ticket operation operated at a loss every year since 1988.

The trustee's expert, Jayne MacPhee, used the revised gross annual ticket revenue described above, and the actual costs of goods and G&A expenses as derived from the bank records, to determine the debtor's annual net profit. Additionally, MacPhee also subtracted the owner's draws and credit card payments made from World Plus or Atlantic Pacific account as expenses. MacPhee Affidavit, Par. 15.

As the following chart makes clear, even giving the debtor the benefit of the "phantom income" for the assumed sales based on the ticket purchases not recorded in her business records, the debtor's travel business fell considerably short of generating any money for payment to investors in any year from 1988 through 1995.

Year	1988	1989	1990	1991	1992	1993	1994	1995
Ticket Revenue (MacPhee Exhibit E	1,261,731	910,760	973,046	835,543	832,934	646,698	454,152	174,903
Ticket COG (MacPhee Exhibit C)	1,169,751	885,623	900,652	713,888	710,077	546,395	377,718	145,467
G & A Expenses (MacPhee Exhibit C)	33,129	64,580	111,147	134,152	151,199	177,927	164,726	68,687
Owners Draws (MacPhee Exhibit C)	103,031	152,557	142,558	115,725	151,807	133,878	73,043	33,626
Credit Cards (Compton Exhibit 17)	17,018	36,306	72,238	86,088	90,608	128,129	69,223	71,841
Totals	(61,198)	(228,306)	(253,549)	(214,310)	(270,757)	(339,631)	(230,558)	(144,718)

The MacPhee calculations quantify a fact of life that was readily apparent to Melanie Cook, one of Raejean's employees. As she testified at her deposition in the SEC litigation:

Q [By Mr. Cameron, SEC lawyer] Did you have an understanding during the time you were working there, as to how Ms. Bonham was paying these investors who were coming in and demanding money? Where the money was coming from?

A [By Melanie Cook, debtor's employee] Not initially. Initially, when I was pretty much excluded from even dealing with the investors or talking to them, I didn't have any opinion one way or the other. But as things started unfolding, with all the legal stuff going on, it began -- began to come -- began to come -- it came very clear to me that the things she had, she was not earning off of World Plus profits. Just like you and I broke it down a little while ago, $100 per ticket. If you take out salaries, and heat, and rent, and lights, and all that kind of stuff, you're left with a negative balance from ticket sales. We were doing these monthly checks to show the profit and loss, and it just wasn't even adding up. (emphasis added)

Cook deposition, page 79, Exhibit 13 to Spraker Affidavit.

D. The Debtor's Investment Program

The vehicle for debtor's Ponzi scheme was the issuance of so-called investment contracts: actually, short term promissory notes bearing extremely high interest rates. Compton Affidavit, Par. 18. At the very beginning of the Ponzi program, debtor offered rates of 50% in "sixty working days." Id., Compton Affidavit, Exhibit 2. As the years passed and the laws of exponential progression began to take their toll, debtor reduced her rates to 50% every six months, then 50% every eight months, then 20% every six months. Compton Affidavit, Par. 18. At the very end of the Ponzi scheme, the debtor cut the term of the investment for a 50% contract from eight months back to three months and ultimately as short as 10 days. Id.

With the compounding of her higher interest obligations, and as debtor's ticket business gradually contracted, the investment aspect of debtor's operation assumed greater and greater importance until it amounted to approximately 99% of her entire cash flow, measured by revenue:

E. Solvency

Solvency is an element of the trustee's preference claims and is also useful to help understand the magnitude of the investment program compared to the ticket program. The debtor's travel business never generated any profit. Yet, each and every year the debtor incurred ever more liabilities on the investment contracts it issued at an annualized actual interest rate of 60-76%. MacPhee Affidavit, Par. 23. Jayne MacPhee has developed financial statements for the debtor covering 1988 through 1995. MacPhee Affidavit, Exhibit H. According to the analysis performed by the trustee's expert, the debtor had a negative net worth of $159,368 at the end of 1988 which blossomed to a loss of $50,519,546 in 1995. Id. at Par. 27. By comparison, investors have filed over $50 million in claims for principal and interest against the estate. Compton Affidavit, Par. 22. As should be self evident from the above discussion, the debtor was insolvent from 1988 through 1995:

Year	1988	1989	1990	1991	1992	1993	1994	1995
Assets (000)	15	27	82	171	205	258	69	(9)
Liabilities (000)	174	746	1,907	4,113	8,141	15,687	28,341	50,510
Net Worth (000)	(159)	(719)	(1,826)	(3,962)	(7,937)	(15,430)	(28,272)	(50,519)

Before traveling down the path of Ponzi schemes and the attendant consequences, it is worthwhile to recall the federal standards of summary judgment under Fed. R. Civ. P. 56(c). Defendants no doubt will tenaciously argue that there are factual questions raised, and therefore, cannot be resolved on summary judgment. However, "the mere existence of some alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment; the requirement is that there be no genuine issues of material fact." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 106 S.Ct. 2505, 91 L.Ed.2d 265 (1986)(emphasis in original). Indeed, Ponzi scheme cases have produced some of the most aggressive summary judgment decisions. In re Agricultural Research and Technology Group, 916 F.2d 528, 533 (9th Cir. 1990); In re Taubman, 160 B.R. 964 (Bankr. S.D. Ohio 1993). Recently, in re Premium Sales Corp., Adv. Case No. 95-0176 BKC-AJA-A, p.7 (Bankr. S.D. Fla. 1997), a bankruptcy case in South Florida involving a Ponzi scheme, the court noted that "[s]ummary judgment is a manifestly appropriate manner of resolving issues as to the existence of a Ponzi scheme, insolvency, commingling of funds, and other issues that flow as a necessary consequence from these determinations." A copy of the court's Order Granting in Part and Denying in Part Trustee's Motion for Consolidated Partial Summary Judgment on Common Issues in re Premium Sales Corp. is attached to the Spraker Affidavit as Exhibit 18.

The party seeking summary judgment carries the burden of demonstrating "why no genuine issue of material fact remains for trial." Agricultural Research, 916 F.2d at 533 (citing Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 2552, 91 L.Ed.2d 265 (1986)). Upon crossing this threshold, the Supreme Court instructed:

When the moving party has carried its burden under Rule 56(c), its opponent must do more than simply show that there is some metaphysical doubt as to the material facts. In the language of the Rule, the nonmoving party must come forward with "specific facts showing that there is a genuine issue for trial." Fed.R.Civ.P. 56(e) (emphasis added). Where the record taken as a whole could not lead a rational trier of fact to find for the nonmoving party, there is no "genuine issue for trial."

Matsushita Elec. Indus. Co. Ltd. v. Zenith Radio Corp., 475 S.Ct. 574, 586-86, 106 S.Ct. 1348, 1356, 91 L.Ed.2d 202 (1986) (citations omitted; footnote omitted).

While all reasonable factual inferences must be drawn in favor of the nonmoving party, implausible factual inferences will not preclude summary judgment. Taubman, 160 B.R. at 975. Where the nonmoving party's argument is implausible, that party "must come forward with more persuasive evidence to support their claim than would otherwise be necessary." Matsushita, 475 U.S. at 587, 106 S.Ct. at 1356; California Arch. Bldg Products v. Franciscan Ceramics, 818 F.2d 1466, 1470 (9th Cir. 1987), cert. denied 484 U.S. 1006 (1988).

With these standards in mind, there is no genuine dispute as to the existence of a Ponzi scheme. The undisputed facts demonstrate that Raejean used proceeds from later investors to pay earlier investors in a classic Ponzi scheme. Because the debtor operated a Ponzi scheme, those payments to investors were made with the actual intent to hinder, delay and defraud her creditors, and the trustee has proven his fraudulent conveyance claims. Also, the Ponzi scheme precludes defendants from asserting the ordinary course of business defense as a defense to the trustee's preference claims.

A. The Debtor Operated a Ponzi Scheme

Courts unanimously agree that the hallmark of any Ponzi scheme is the use of later investors to pay earlier investors. Cunningham v. Brown, 365 U.S. 1, 44 S.Ct. 424, 68 L.Ed. 873 (1924). In In re Agricultural Research and Technology Group, 916 F.2d 528, 531 (9th Cir. 1990), the Ninth Circuit concluded that:

A Ponzi scheme is an arrangement whereby an enterprise makes payments to investors from the proceeds of a later investment rather than from profits of the underlying business venture, as the investors expected. The fraud consists of transferring proceeds received from the new investors to previous investors, thereby giving other investors the impression that a legitimate profit making business opportunity exists, where in fact no such opportunity exists. See Cunningham v. Brown, 365 U.S. 1, 44 S.Ct. 424, 68 L.Ed. 873 (1924).

see also; In re United Energy Corp., 944 F.2d 589, 590 n.1 (9th Cir. 1991)

... a fraudulent arrangement in which an entity makes payments to investors from monies obtained from later investors rather than from any "profits" of the underlying business venture. The fraud consists of funnelling proceeds it received from new investors to previous investors from the alleged business venture, thereby cultivating an illusion that a legitimate profit-making business opportunity exists and inducing further investment. ; In re M & L Business Machines Co., Inc., 84 F.3d 1330, 1332 n.1 (10th Cir.), cert. denied, 117 S.Ct. 608 (1996); In re Cohen, 199 B.R. 709, 717 n.9 (9th Cir. B.A.P. 1996).

In this case, the debtor was unable to produce any net profit from ticket sales since 1988. MacPhee Affidavit, Par. 16; Exhibit E. Rather, as elaborated above, the debtor was compelled to rely on an infusion of subsequent investor capital not only to maintain the ticket business, but to pay existing investors when their contracts matured in a classic Ponzi scheme. Id. at Par.Par. 18-19; Funk Declaration, Par. 12.

The debtor's failure to use investor money according to the stated purpose of the investment is an additional characterization of a Ponzi scheme. Funk Declaration, Par. 10. Here, the debtor told her investors that she needed investments to purchase large blocks of frequent flier mileage. But, the debtor never purchased blocks of mileage. Compton Affidavit, Par. 8. In fact, the debtor never needed investments to purchase her tickets because she collected the full amount of the ticket purchase price before paying her ticket supplier. Walrath Declaration, Par. 7-10 [Spraker Affidavit, Exhibit 11]; Troyn Declaration, Par. 7-10 [Spraker Affidavit, Exhibit 12]; Bonham Deposition, p. 111 [Spraker Affidavit, Exhibit 14]. Moreover, we know how much the debtor actually spent to purchase her tickets.

The debtor had only two sources for her deposits: her ticket business and investments. It is undisputed that the debtor spent all the deposits in the bank account. Yet, the debtor's ticket purchases were only a fraction of the total disbursements. Consistent with the Ponzi nature of the scheme, the percentage of funds used to purchase tickets shrank every year even though total deposits exploded as more and more investments came due and were paid.

Rather than use investors' deposits to purchase frequent mileage inventory as she told her investors, the debtor used new investor funds to pay prior investors in a classic Ponzi scheme. The debtor's inability to generate any money from her travel business demonstrates that the debtor had to rely on later investment to pay earlier investment. The debtor's bank records show that, despite her stories to her investors, she actually used the investments to pay earlier investors in a Ponzi scheme. Because there is no genuine dispute of material fact that the debtor operated a Ponzi scheme, the court should enter partial summary judgment on this issue.

B. Debtor's Ticket Business Does Not Legitimize the Ponzi Scheme

Defendants have previously argued that the debtor could not have operated a Ponzi scheme because Raejean was engaged in legitimate business activity. Under their interpretation of the case law, the debtor must use 100% of her ill-gotten gains to pay the investors to create a Ponzi scheme.

This argument was rejected in Scholes v. Lehmann, 56 F.3d 750 (7th Cir. 1995), cert. denied, 116 S.Ct. 673 (1995). Scholes involved a receiver's efforts to recover net profits from an investor in a Ponzi scheme under Illinois law. Writing for the Seventh Circuit, Judge Posner noted that it was immaterial where the payment specifically came from because it was generated from a Ponzi scheme:

It is no answer that some or for that matter all of [defendant's] profit may have come from "legitimate" trades made by the corporations. They were not legitimate. The money used for the trades came from investors gulled by fraudulent representations. [Defendant] was one of those investors, and it may seem "only fair" that he should be entitled to the profits on trades made with his money. That would be true as between him and [the principal or his corporations]. It is not true as between him and either the creditors or the other investors in the corporations. He should not be permitted to benefit from a fraud at their expense merely because he was not himself to blame for the fraud. All he is being asked to do is to return the net profits of his investment - the difference between what he put in and what he had at the end.

Id. at 757-758.

The court in In re Taubman, 160 B.R. 964 (Bankr. S.D. Ohio 1993) also considered the impact of the debtor's "legitimate" business activity upon the Ponzi scheme. There, the debtor performed accounting and real estate services, but also offered allegedly tax-free real estate investments providing approximately 20% return per annum, though the return on a monthly basis could be significantly higher. As in the instant case, investors faced with fraudulent conveyance claims disputed that the debtor operated a Ponzi scheme, and argued that the debtor's legitimate business should be segregated and excluded from the investment business. Id. at 978. The court dismissed this argument:

The uncontroverted evidence demonstrates that the Debtor was engaged in a Ponzi scheme continuously from January 1, 1978 to May 3, 1989. To operate this scheme, the Debtor induced investors, including those she knew from all her business activities, to participate by promising high rates of return and representing to them that they would receive favorable real estate transactions and favorable tax treatment. Funds received by the Debtor from these investors were not segregated into any separate accounts; but instead, these funds were deposited into any of Debtor's unrestricted accounts and commingled without distinction with other funds held by the Debtor. Likewise, without distinction, the Debtor expended these funds using them to pay promised returns and personal and business-related expenses, including payroll, rent, and interest payments on bank notes. Funds paid to prior investors were not financed by any business ventures or any other "legitimate" source but were financed from new investors' monies. Notably, no investment of any magnitude and no profits from any of her businesses existed to contribute a material amount, if any at all, to the repayment of investor monies.

Id. at 978-79 (Emphasis added); see also In re Premium Sales Corp., Spraker Affidavit, Exhibit 17, p. 26 ("For the reasons expressed in Scholes and Taubmann, this Court finds that the possible use of an Investor Defendant's funds for 'real' transactions is not a defense to an action for avoidance and recovery of 'false profits.'")

Neither the Agricultural Technology nor Taubman courts had any difficulty realizing that the facade of non-Ponzi business does not somehow legitimize the fraud perpetuated by the debtor. See also In re M & L Business Machines (Jobin v. McKay), 155 B.R. 531, 533 (Bankr. D. Colo. 1993), aff'd 164 B.R. 657 (D. Colo. 1994), aff'd 84 F.3d 1330 (10th Cir.), cert. denied, 117 S.Ct. 608 (1996) (debtor "began operating a classic pyramid or Ponzi scheme concurrently with the continuing, albeit diminished, legitimate business.") Indeed, the facade of a legitimate business is essential to the Ponzi scheme. As in Agricultural Research, Taubmann, and M & L Business Machines, Raejean Bonham operated a purportedly "legitimate" business to provide a veneer of legitimacy to her operations. As in those cases, that business does not convert the fraud to a legitimate business.

C. THE TRUSTEE IS ENTITLED TO FINAL JUDGMENT ON HIS PREFERENCE CLAIMS

1. The Elements of Preference in Section 547(b) Are All Established as a Matter of Law

The trustee may avoid any "transfer of an interest of the debtor in property" made to or for the benefit of a creditor on account of an antecedent debt while the debtor was insolvent within 90 days of the petition date that permits it to receive more than it would receive in liquidation under Chapter 7. 11 U.S.C. ß 547(b). The payment of money constitutes a transfer of an interest of the debtor for purposes of ß 547(b). Though obtained to operate a Ponzi scheme, the money invested in that scheme became property of the debtor, "susceptible of preferential and fraudulent disposition as other property." In re Taubman, 160 B.R. at 982 (quoting In re Independent Clearing House Co., Inc., 77 BR 843, 854 (D. Utah 1987)); see also In re Hedged-Investments Associates, Inc., 163 B.R. 841, 850 (Bankr. D. Colo. 1994), aff'd 84 F.3d 1286 (10th Cir., 1996).

It is beyond dispute that the defendants were creditors of the debtor at the time of payment, and that payment was on account of an antecedent debt. Thus, the requirements of ßß 547(b)(1) and (2) are met.

The court has orally ruled that December 19, 1995, constitutes the petition date for the trustee's preference and fraudulent conveyance claims for the debtor individually, as well as the so-called corporations WPI and APFC. The date a check clears is the controlling date for preference claims. Barnhill v. Johnson, 503 U.S. 393, 112 S.Ct. 1386 118 L.Ed.2d 39 (1992). Attached to the Spraker Affidavit as Exhibit 15, is a report detailing the date and amount of payments by date payment cleared the debtor's accounts. There should be no dispute that the Preference Payments were made within 90 days of December 19, 1995.

Section 547(b)(4) requires that the trustee prove the debtor was insolvent on the date of the transfer. However, insolvency is presumed for the 90 days prior to the petition date. 11 U.S.C. ß 547(f). Moreover, it was noted by the court in Independent Clearing House, "[b]y definition, an enterprise engaged in a Ponzi scheme is insolvent from day one. 77 B.R. at 871. Regardless of these presumptions, the debtor has been insolvent since 1988, and certainly for the 90 days to one year prior to the petition date. MacPhee Affidavit, 28 Par., Exhibit H.

Under ß 547(b)(5), the trustee may recover the total amount paid to the Preference Defendants within 90 days of the petition date assuming that the payments allowed the investor to recover more than he would receive in liquidation. The Ninth Circuit applies an expansive "percentage" test to determine whether a transfer allowed the creditor to recover more than it otherwise would in the Chapter 7. In re Lewis W. Shurtleff, Inc., 778 F.2d 1416 (9th Cir. 1985) (where a Chapter 7 case will result in less that a full distribution on the unsecured claims, any preference payment enables the creditor to receive more than it would in the Chapter 7). While it is impossible to state what the precise distribution will be, it is certain that it will less than 100%. Compton Affidavit, Par. 41.

There are no genuine disputed issues of material fact on the trustee's preference claims. Therefore, summary judgment against the Preference Defendants identified in Spraker Affidavit, Exhibit 1, in the amount indicated, is appropriate.

2. With the Exception of Section 547(c)(4) [Subsequent New Value], There Are No Defenses to the Trustee's Preference Cause of Action.

Once the trustee establishes the five elements of a preference under Section 547(b), there is a limited set of defenses. The universe of defenses consists of exactly seven defenses, contained at Section 547(c)(1) through (c)(7). In this instance, there are only two potentially applicable defenses to the trustee's preference claims: the ordinary course of business defense (ß 547(c)(2)) and subsequent new value (ß 547(c)(4)).

Case law is unanimous that ß 547(c)(2), the ordinary course of business defense, is not available in Ponzi scheme cases. In re Bishop, Baldwin, Rewald, Dillingham & Wong, 819 F.2d 214 (9th Cir. 1987); In re Bullion Reserve of North America, 836 F.2d 1214, 1219 (9th Cir.) cert. denied, 486 U.S. 1056 (1988) ("Congress intended the ordinary course of business exception to apply only to transfers of legitimate business enterprises. We also noted that the Bankruptcy Code's purpose was not to protect one victim of a debtor's fraud at the expense of others.") The trustee has established that the debtor operated a Ponzi scheme, and that the challenged payments were made as part of that scheme. Therefore, the investor defendants may not defend the trustee's preference claims on the theory that the payments were made in the ordinary course of the debtor's business.

The only remaining defense is ß 547(c)(4), subsequent new value. This section, unartfully drafted,

(c) The trustee may not avoid under this section a transfer -

(4) to or for the benefit of a creditor, to the extent that, after such transfer, such creditor gave new value to or for the benefit of the debtor -

(A) not secured by an otherwise unavoidable security interest; and

(B) on account of which new value the debtor did not make an otherwise unavoidable transfer to or for the benefit of such creditor.

means - as applied to this case - that the trustee's preference claim with respect to a particular payment, is reduced on a dollar-for-dollar basis by any subsequent cash investment by that defendant that was not repaid by a later unavoidable payment from the debtor. The key is that the new investment must happen after the preference payment. So, if an investor receives $22,500 sixty days before the petition on contract #1, and invested $10,000 eighty days before the petition on contract #2, there is no ß 547(c)(4) defense because the new value in question was not subsequent to the payment. New value is defined at Section 547(a)(2)

money or money's worth in goods, services, or new credit, or release by a transferee of property previously transferred to such transferee in a transaction that is neither void nor voidable by the debtor or the trustee under any applicable law, including the proceeds of such property, but does not include an obligation substituted for an existing obligation.

11 U.S.C. ß 547(a)(2) (Emphasis added). such that it means actual cash invested, not a rollover of a previous contract. See generally, Bowmar, The New Value Exception to the Trustee's Preference Avoiding Powers, Getting the Computation Straight, 69 Am. Bankr. L. J. 65 (1995).

In the ninety days preceding the bankruptcy, Raejean was late on her payments to practically everyone and bounced a large number of checks. Those investors who did receive payments almost uniformly declined to invest anew. Those few investors who did invest anew are given credit for the subsequent new value in the separate affidavit of damages in each individual BRA case. The preference payments sought by the trustee detailed at Spraker Affidavit, Exhibit 1, are net of any actual money invested after the challenged preferential payment.

D. DEFENDANTS' RECEIPT OF PAYMENTS FROM THE DEBTOR'S PONZI SCHEME ESTABLISHES SECTION 548(a)(1) FRAUDULENT INTENT AS A MATTER OF LAW

Under ß 548(a)(1) of the Bankruptcy Code and AS 34.40.010 (or Alaska common law) the trustee must prove the debtor made payments to the investors with an actual intent to delay, hinder, or defraud its creditors. The actual intent necessary to sustain a fraudulent conveyance claim is that of the debtor/transferor, "[c]ulpability on the part of the ... transferees is not essential." In re Cohen, 199 B.R. at 717. Nor must the trustee prove that the debtor made the transfers with malice or while insolvent. Id. While the debtor's subjective actual intent could be a factual issue, that issue does not preclude summary judgment because her operation of the Ponzi scheme is sufficient as a matter of law to establish conclusively that she acted with fraudulent intent.

In In re Agricultural Research & Tech. Group, Inc. 916 F.2d 538, 535-36 (9th Cir. 1990) the bankruptcy trustee sued investors in a Ponzi scheme selling and buying seedlings from its "investors" to recover payments as fraudulent conveyances made more than one year prior to the petition date. The Ninth Circuit examined the requirement that the trustee prove the debtor paid the funds with the actual intent to defraud. The Ninth Circuit concluded: "the mere existence of a Ponzi scheme, which could be established by circumstantial evidence, has been found to fulfill the actual intent on the part of the debtor." Id. at 536.

The court reasoned that the fundamental nature of Ponzi schemes depend on making payments not from the operation of the business, but from inducing additional investments, which must ultimately be a self-defeating process. Thus, the court concluded: "[the debtor] should have known that transferring funds to earlier investors from later investors and not from the proceeds of the underlying business would ultimately operate to the detriment of its creditors." Id. The Ninth Circuit relied on the reasoning set forth in Independent Clearing House, 77 B.R. at 860:

One can infer an intent to defraud future undertakers from the mere fact that a debtor was running a Ponzi scheme. Indeed, no other reasonable inference is possible. A Ponzi scheme cannot work forever. The investor pool is a limited resource and will eventually run dry. The perpetrator must know that the scheme will eventually collapse as a result of the inability to attract new investors. The perpetrator nevertheless makes payments to present investors, which, by definition, are meant to attract new investors. He must know all along, from the very nature of his activities, that investors at the end of the line will lose their money. Knowledge to a certainty constitutes intent in the eyes of the law, cf. Restatement (Second) of Torts 8A (1963 & 1964), and a debtor's knowledge that future investors will not be paid is sufficient to establish his actual intent to defraud them. (further citations omitted).

One can infer an intent to defraud future undertakers from the mere fact that a debtor was running a Ponzi scheme. Indeed, no other reasonable inference is possible... The perpetrator must know that the scheme will eventually collapse as a result of the inability to attract new investors.

* * *

We conclude that it was sufficient to establish, as a matter of law, the debtor's actual intent to hinder, delay or defraud creditors within the meaning of section 548(a)(1).

Id. at 860-61.

(Emphasis added); See also In re M & L Business Machines Co. (Jobin v. Ripley), 198 B.R. 800 (D. Colo. 1996) ("having determined the Debtor to be a Ponzi scheme, the only inference to be drawn was that it had the requisite actual intent to hinder, delay or defraud under 548(a)(1)."); In re Cohen, 199 B.R. at 717. The collapse of the debtor's Ponzi scheme only further proves this point.

As in Agricultural Research, M&L Business Machines, and Clearing House, there are no genuine disputed issues of material fact that: (1) the debtor operated a Ponzi scheme, and (2) defendants were paid from proceeds of that Ponzi scheme. Under Agricultural Research, M&L Business Machines, and every case to consider the issue, these undisputed facts establish that the debtor transferred interests with the actual intent to hinder, delay and defraud her creditors as a matter of law, and summary judgment in favor of the trustee is appropriate on his fraudulent conveyance claims under ß 548(a)(1).

E. DEFENDANTS' RECEIPT OF PAYMENTS FROM THE DEBTOR'S PONZI SCHEME ESTABLISHES FRAUDULENT INTENT AS A MATTER OF LAW FOR TRUSTEE'S STATE LAW FRAUDULENT CONVEYANCE CLAIMS.

1. The Trustee Meets the Requirements of § 544(b).

The trustee may apply Alaska's fraudulent conveyance law to the extent that an unsecured creditor could do so. 11 U.S.C. ß 544(b). AS 34.40.010 provides that any conveyance made with the actual intent to hinder, delay, or defraud creditors is void "as against the persons so hindered, delayed or defrauded...." The trustee, therefore, may assert fraudulent conveyance claims under Alaska law if there were unsecured creditors that could have asserted such claims on the dates of the challenged transfers.

Delta Airlines filed Claim No. 1002 for an amount in excess of $10,000,000 in the main case. As detailed in the exhibits to Delta's proof of claim, the claim arises from Raejean's and World Plus' sale of frequent flier tickets. Raejean, individually and through World Plus, engaged in this practice since December 1989, the earliest date the trustee may seek to avoid any transfers under Alaska law. Because Delta had an unliquidated unsecured claim every time Raejean, or World Plus, sold a Delta frequent flier ticket, there is a general, unsecured creditor sufficient to trigger the provisions of 11 U.S.C. ß 544(b).

At the time of the petition date Delta held valid claims against the debtor for the tortious interference with contractual relations between Delta and its frequent fliers. Delta commenced Delta v. Seward, et al., Case No. 1:93-CV-1036-HTW in May 1993. Delta amended its complaint to include Raejean and World Plus on September 13, 1993 (Docket 25), and return of service for Raejean and World Plus was filed on October 4, 1993. A copy of the amended complaint and docket for the Delta case are attached to the Spraker Affidavit as Exhibit 16. Under Georgia law, Delta may assert claims for tortious interference with a contract (between Delta and its frequent fliers) against Raejean and World Plus for four years prior to the initiation of the lawsuit. Long v. A.L. Williams & Assoc., Inc., 323 S.E.2d 868, 870 (Ga. App. 1984). Accordingly, at the time of the involuntary petition on December 19, 1995, Delta had unsecured claims reaching back to at least September 13, 1989. World Plus continued to sell Delta frequent flier tickets after the commencement of the lawsuit creating additional claims until the involuntary petition on December 19, 1995. Delta's damage period is coextensive with the fraudulent conveyance period provided under Alaska state law. Therefore, Delta satisfies the requirements of an unsecured creditor at the time of all transfers under ß 544(b).

2. The Debtor's Operation of a Ponzi Scheme Compels Summary Judgment on the State Fraudulent Conveyance Claims.

The trustee asserts that the debtor made, or directed, every payment to investors within six years of the Petition Date with the actual intent to hinder, delay and defraud her creditors, including Delta. For the reasons set forth in Section I, supra, the debtor operated a Ponzi scheme for the period relevant to this action; December 1989-1995. The debtor's records show that the debtor has never made a profit since 1988 when her investment debt began its geometric escalation. By 1989 her investments had overtaken her ticket business and she was forced to bring in new investors to pay the maturing investment debt, as well as subsidize her business. MacPhee Affidavit, Par.Par. 18-19.

As recognized by every court to consider the subject, the debtor's operation of the Ponzi scheme and payments made as part of that scheme are inherently fraudulent because the income used to pay investment is generated by fraudulently inducing investors to unwittingly pay off prior investors. There is no reason why these decisions, interpreting the analogous provisions of the Bankruptcy Code and state statutes, are not persuasive.

F. SUMMARY JUDGMENT ON LIABILITY AND DAMAGES IS APPROPRIATE FOR ANYONE WHO WAS A NET GAINER

Having established that the payments to defendants were fraudulent conveyances under ß 548(a)(1) and AS 34.40.010, the question becomes one of damages. Under the Bankruptcy Code, a fraudulent transferee may retain the transfer to the extent he gave value and received the transfer in good faith. 11 U.S.C. ß 548(c). The same result occurs under Alaska law, specifically AS 34.40.110. Whether the individual defendants received payments from the debtor in good faith is a question for another day. However, the defendants identified in Spraker Affidavit, Exhibit 1 received more than they invested and cannot establish the other half of the equation necessary for their affirmative defense: value.

1. Net Gainers Cannot Establish Value under § 548(c).

Value is a well defined concept in Ponzi scheme cases. Courts, including the Ninth Circuit, have exhaustively examined when an investor in a Ponzi scheme gives "reasonably equivalent value" under the constructive fraud provisions of 11 U.S.C. ß 548(a)(2)(A). Courts uniformly hold that payments made to investors from a debtor who operated a Ponzi scheme are made for "value" to the extent they pay back the investor's principal investment. In re United Energy Corp., 944 F.2d 589, 596 (9th Cir. 1991); In re M&L Business Machines, 84 F.3d 1330, 1341-42 (10th Cir. 1996); In re Clearing House Co, 77 B.R. at 857. Importantly, courts premise their findings of reasonably equivalent value upon the assumption that the investor holds a claim against the debtor arising from the debtor's fraud in operating a Ponzi scheme and inducing the investor to participate. Such investors "exchanged reasonably equivalent value when their rights to restitution were proportionately reduced by the [Ponzi] payments they received." Id. at 595; see also In re Independent Clearing House Co., Inc., 77 B.R. 843, 857 (D. Utah 1987).

The "value" to the debtor is limited to the amount actually invested by the defendant and is available only to those investors who participated without culpable knowledge of the Ponzi scheme. United Energy, 944 F.2d at 596, n. 7. Courts uniformly hold that any payments exceeding the money invested are recoverable because the investors' claims for restitution, the release of which comprised the "value" to the debtor, have been exhausted. Thus, the Ninth Circuit has stated that if an investor in a Ponzi scheme receives more than he or she invested, "[s]uch excess amounts would be avoidable because the debtor would not have received reasonably equivalent value for them." United Energy, 944 F.2d at 595 n. 6; see also In re Rodriguez, 209 F. Supp 424, 434 (Bankr.S.D.Tex. 1997); In re: M & L Business Machine Company, Inc. (Jobin v. Ripley), 198 B.R. 800 (D.Colo. 1996) (entering judgment on the trustee's ß 548(a)(2) claims for the amount in excess of that invested in the debtor's Ponzi scheme); In re Independent Clearing House Co., 77 B.R. at 857 ("the debtors did not receive "value" in exchange for transfers given defendant to the extent the transfers exceeded the amount the defendant had advanced to the debtors.")

The trustee is not breaking new ground by seeking partial summary judgment against the net gainers under ß 548 and the state law equivalent. In In re Taubman, 160 B.R. 964 (Bankr. S.D. Ohio 1993), the trustee sued investors in the debtor's Ponzi scheme to recover all payments received under ßß 548 and 544(b). As in the present case, the trustee in Taubman sought summary judgment to establish the debtor's actual intent to hinder, delay and defraud for purposes of ß 548(a)(1) and the state law equivalent based on the debtor's Ponzi scheme. Id. at 983. The trustee also sought summary judgment to recover the "false profits" paid to the individual defendants. Id. The trustee defined "false profits" as the excess between the amount invested and the amounts received. Id.

The Taubman court analyzed the trustee's fraudulent conveyance claims under ß 548(a)(2), and held that amounts in excess of the defendants' investments were not made for value. Id. at 985-86. The defendants argued that the trustee's claims were barred by ß 548(c) which provides transferees of a fraudulent conveyance an affirmative defense to the extent that they receive the transfer in good faith and for value. 11 U.S.C. ß 548(c). While the defendants emphasized their good faith, ß 548(c) could not preclude recovery of the transfers in excess of the amounts invested by a defendant because if the defendants failed to give "value" to the debtor for purposes of ß 548(a)(2) for payments in excess of the defendants' investments, then the debtor did not receive "value" for purposes of the 548(c) defense either. Id. at 987. The court concluded:

... what the defendants gave this Debtor in exchange for the transfers was not "value" within the meaning of ß 548. "Good faith" on the part of a defendant or claimant is not material to the determination of value, which is an essential element to a defense under ß 548(c). Thus, to the extent the Trustee seeks to avoid false profits, ß 548(c) does not provide a defense for any defendant.

Id.; See also In re Independent Clearing House Co., Inc., 77 B.R. 861 ("The extent to which a defendant gave "value" for a particular transfer is essentially the flip side of the question we have already discussed under section 548(a)(2)."); Premium Sales, p. 24 ("For the same reasons that transfers of 'false profits' in excess of an Investor Defendant's investment are not made for reasonably equivalent value in exchange, those transfers also are not excepted from avoidance under 11 U.S.C. ß 548(c), because the transferee does not give value for 'false profits.'")

Value for purposes of ß 548(a)(2) and ß 548(c), therefore, must be interpreted to mean the same thing; the release of the defendants' claims against the debtor. Because the defendants' claims are limited to the money actually invested, any payments in excess of that amount cannot be for value and they cannot prove the element of "value" necessary for the defense under ß 548(c). Under ß 548(a)(1), the trustee is entitled to all payments in excess of the defendants' investments received within the one year prior to the petition date.

2. The same result must occur under Alaska law.

Alaska law also provides an affirmative defense to a recipient of a fraudulent transfer if the person gave "valuable consideration unless it appears that the purchaser had notice of the fraudulent intent of the purchaser's immediate grantor, or of the fraud rendering void the title of the grantor." AS 34.40.100. While no Alaska case has addressed the case here presented, the district court in In re Independent Clearing House Co., 77 B.R. 843 (D. Utah 1987) considered the application of an identical state statute on the Chapter 7 trustee's state law fraudulent conveyance claims arising from the debtor's Ponzi scheme. AS 34.40.100. Id. at 866-67. Specifically, the court held:

Although the phrase "valuable consideration" is not expressly defined in the statute, the concept is similar to the concept of "value" in section 548 of the Code. We conclude that the term "consideration" includes both a conveyance of "property" and satisfaction of an antecedent debt. Cf. Utah Code Ann. ß 25-1-3 ("fair consideration" includes both a conveyance of property and satisfaction of an antecedent debt); 11 U.S.C. ß 548(d)(2)(A) ("value means "property" or satisfaction of a present or antecedent debt). For the reasons previously discussed in Part IV-B-2 of this opinion, we conclude that a defendant gave "valuable consideration" for the transfers he received to the extent the transfers did not exceed his undertaking. Such transfers satisfied the debtor's obligation to repay the undertaking. However, for the reasons previously discussed we also conclude that a defendant did not give valuable consideration for a transfer to the extent the transfer exceeded the amount of his undertaking. Therefore, for such transfers, section 25-1-13 [Utah's equivalent of AS 34.40.100] is no defense.

Id. at 867.

As recognized by Independent Clearing House, there is no reason in policy or law why "valuable consideration" under AS 34.40.100 (or Alaska common law) should be interpreted any differently than "value" under ß 548(c). The fact remains that defendants have a claim only for the amounts actually invested, and anything in excess of that allows them to retain the benefits of the debtor's fraud at the expense of another investor. The court should conclude that defendants did not provide "valuable consideration" to the debtor for payments in excess of their investment.

G. Rule 54(b) Final Judgment is Appropriate on the State and Federal Fraudulent Conveyance Claims.

The trustee requests, pursuant to Fed. R. Civ. P. 54(b), that the court certify as a final judgment the partial summary judgment on: (1) preference claims and claims against the net gainers; and (2) the issue of whether the debtor operated a Ponzi scheme. Rule 54(b) certification is appropriate where: (1) multiple parties or claims are involved; (2) at least one claim or the rights and liabilities of one party have been finally adjudicated; and (3) there is no just reason to delay an appeal. Continental Airlines v. Goodyear Tire & Rubber Co., 819 F.2d 1519, 1525 (9th Cir. 1987); Morrison-Knudsen Co. v. Archer, 655 F.2d 962, 965 (9th Cir. 1981). All of these requirements are amply met in these cases.

1. The trustee has sued multiple parties on multiple claims.

In the instant case, the trustee has sued multiple parties and asserted multiple claims over five hundred adversary cases that are being administered collectively in this action. The trustee has asserted claims for preferences, fraudulent conveyances, and usury. The preference claims involve separate elements and rest on a factual predicate separate from the fraudulent conveyance claims and usury. The trustee has sued multiple parties on multiple claims.

2. Partial Summary Judgment on the Preference and Net Gainers is Final for Purposes of Rule 54(b)

While not an element of any claim, the Ponzi scheme question precludes the primary affirmative defense applicable to the preference claims and establishes the trustee's fraudulent conveyance claims as a matter of law. The practical effect of this determination is to establish liability and damages against all defendants for the preference claims and all net gains as federal or state fraudulent conveyances. Those claims are final for purposes of Rule 54(b). Indeed, there are a handful of cases where the only damages sought were for preference actions.

3. There is No Just Reason to Delay Appeal

The certifying court must make an express finding that there is no just reason for delay and give its reasoning. HBE Leasing v. Frank, 48 F.3d 623, 631 (2nd Cir. 1995). The First Circuit has instructed courts to analyze: "(1) the relationship between the adjudicated and non-adjudicated claims, (2) the possibility that the need for review might be mooted by future developments in the district court, (3) the possibility that the same issue might have to be considered again by the reviewing court, (4) the presence or absence of a claim or counterclaim which might result in a setoff against the judgment which is to be made final, and (5) miscellaneous considerations such as delay, economic and solvency considerations, efficiency, frivolity of competing claims and expense." In re Aero-Fastener, Inc., 177 B.R. 120, 133 (Bankr. D. Mass. 1994). None of these factors militates toward delay in this case.

The claims and issues raised in this partial summary judgment affect every one of the five hundred adversary defendants involved in this litigation. As explained above, with the exception of the usury claims, the remaining issues in this case pertain to the defendants' affirmative defenses, not to the trustee's claims. These issues of good faith and value are distinct from whether the debtor operated a Ponzi scheme, or if she made preferential payments. A reviewing court will not be subject to multiple consideration of the matters raised by this motion.

Certifying this partial summary judgment under Rule 54(b) could also promote resolution of the Bonham bankruptcy proceeding. Once liability is established, collection of amounts owed to the estate by the BRA defendants should take place as rapidly as possible, in order to reach the goal of paying dividends to the hundreds of investors who received nothing in return, and thus financed the payments to the BRA defendants. Once a judgment is final the trustee can proceed with collection, or defendants will have to provide security pending appeal; in either case the estate and allowed claimants will benefit. The alternative of allowing defendants who know they are liable to escape payment while the rest of the issues are being resolved is far less desirable.

For the reasons stated above, the court should find on summary judgment that the debtor operated a Ponzi scheme from 1988 through the petition date and enter Rule 54(b) judgment as set forth above.

Dated this 6th day of January, 1998.

BUNDY & CHRISTIANSON
Attorneys for Trustee

By: /s/Cabot Christianson

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