In re Raejean S. Bonham dba World Plus
Bankruptcy No. F95-00897
Unofficial Web Site
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, Case No. F95-00897 HAR
Debtor.
Larry Compton, trustee, through undersigned counsel, moves the court pursuant to Bankruptcy Rules 1015, 7015, and 11 U.S.C. § 105(a), for an order confirming that the assets and liabilities of Raejean Bonham, together with her entities "World Plus, Inc." and "Atlantic Pacific Funding Corp." are subject to joint administration in this case, and substantively consolidating the Bonham estate together with the estates of her entities, assuming that separate estates exist, based on the doctrine of alter ego. The trustee also requests that the Court confirm that the date for all avoidance actions under the Bankruptcy Code, and applicable state law, is December 19, 1995, the date of the involuntary petition against Bonham d/b/a World Plus.
The trustee has instituted approximately 500 adversary actions to avoid payments made to investors in what the trustee contends was Bonham's Ponzi scheme, orchestrated by her through her captive corporate shells World Plus, Inc. and Atlantic Pacific Funding Corporation. The trustee seeks avoidance of preferential payments under Section 547 of the Bankruptcy Code and of fraudulent transfers under Section 548 of the Bankruptcy Code, AS 34.40.010, and to impose a penalty for receipt of usurious interest pursuant to AS 45.45.030. In an effort to retain these avoidable transfers, some of the avoidance defendants have raised issues regarding the debtor(s) in this case, and the trustee's standing to maintain these actions. To put these issues to rest, the trustee brings this motion to determine all assets of Raejean Bonham, World Plus, and Atlantic Pacific are subject to joint administration in this case with the avoidance date of December 19, 1995. The trustee also seeks a determination that World Plus and Atlantic Pacific are the alter egos of Raejean Bonham she has used as her mere instrumentalities to perpetuate fraud on the public and her creditors on a massive scale. Accordingly, the trustee asks that the court enter an order substantively consolidating the estates of Bonham, World Plus, and Atlantic Pacific, assuming that separate estates exist.
Because the relief sought is fact specific, the trustee provides a detailed discussion of the facts as known at the present time.
A. In the Beginning there was World Plus
Raejean Bonham has previously represented to the Court that she has been in business for over 15 years in Fairbanks, Alaska. The stated nature of the business, as described by Bonham during the initial December 20, 1995 hearing on the Motion to Appoint Interim Trustee, and again at the hearing on the trustee's Motion to Convert, was the resale of frequent flier tickets to the public. Copies of the pertinent pages of the transcripts for the Motion to Appoint Interim Trustee and the Motion to Convert Case are attached as Exhibits 67 and 68 respectively. However, this was only the cover for her much more substantial business which formed the core of her Ponzi scheme. Bonham offered investments to individuals purportedly to enable her to purchase large blocks of frequent flier mileage from large corporations such as Apple, Magnavox, and IBM. See Affidavit of Larry Compton dated January 22, 1997 (hereafter "Compton Affidavit") Exhibit 29. In ongoing discovery in the Bonham Recovery Action, the trustee has found investment contracts issued by World Plus, Inc., as far back as August 5, 1988 for investments returning 50% in 60 working days (approximately three months). Exhibit 35. This is an annual percentage rate of 200%!
Though doing business as "World Plus, Inc.," since at least 1988, Bonham did not actually form a corporation until 1991. See Certificate of Incorporation for World Plus, Inc. issued on April 22, 1991, a copy of which is attached as Exhibit 8. Bonham's Articles of Incorporation identify her as World Plus' incorporator, registered agent, and sole director. Id. Bonham filed her Initial Biennial Report in Juneau, Alaska identifying herself as the sole shareholder, president, treasurer, secretary, and sole director. See Initial Biennial Report, a true and accurate copy of which is attached as Exhibit 9. The only other officer was her husband Steve Bonham who was listed as the vice-president. Id. There is nothing in the corporate book to reflect the issuance of stock certificates, how the corporation was capitalized, or how it ever acquired any assets. Compton Affidavit, ¶ 24. World Plus, Inc. was involuntarily dissolved on September 18, 1995. See Certificate of Involuntary Dissolution dated September 18, 1995, a copy of which is attached as Exhibit 10.
In August and September 1992, Ed Watkins, Securities Examiner for the Alaska Department of Commerce and Economic Development, talked with several investors of World Plus, Inc., including Ed Maynard, Asst. US Attorney Ken Roosa, and David Curwen of the Fairbanks Police Department regarding the nature and extent of the "investment program." On September 4, 1992, Ed Watkins spoke to Bonham who told him that she had no idea the investment might be a security. See Memorandum of Ed Watkins dated September 4, 1992, ac copy of which is attached as Exhibit 47. Bonham represented to Watkins that there would be no new investment sales or rollovers until the matter was resolved. Id. Undeterred by her promises, she continued to sign investment contracts. Compton Affidavit, ¶ 72, Exhibit 48.
Unhappy about the State of Alaska's investigation, and in apparent response to the inquiries about her investment program, Bonham wrote a letter to the "Investors of World Plus, Inc." dated September 28, 1992. Specifically, Bonham informed her investors:
It has come to my attention once again that a few investors have been violating the understood agreement that this a confidential program and is not to be discussed with anyone. It is extremely important to observe this rule in the program and not give out any information to family members, friends or financial institutions.
See Letter dated September 28, 1992 from Raejean Bonham, Exhibit 49.
On November 17, 1992, attorney Richard Hompesch, counsel for World Plus, wrote to Ed Watkins about the World Plus investigation. Hompesch enclosed a list of active investors showing the date each first became involved and total funds invested showing 35 investors with investments of $560,000. A copy of the November 17, 1992 letter is attached as Exhibit 50. The enclosures included testimonials from the most influential and prestigious investors in World Plus: Chris Farwell (U.S Airlines pilot), Ken Goldman (Palmer D.A.), Robert Ginther (general manager of Tip-Top Chevrolet), William Dutton (President/CEO Northern Schools Fed. Credit Union), Ken and Helen Roosa (Asst. U.S. Atty), Wayne S. Nelson (Raejean's landlord and former mayor of Fairbanks), Jack C. Mellor (Assoc. District Manager, BLM), Cathy Voight (paralegal with Alaska Atty. General), Victor R. Gunn (Lt. Fbks. Police Dept.), Richard Ray (then Ass't D.A.), John F. Rosie (attorney), John Hagey (Asst Public Defender-wife works for Office of Public Advocacy, Gayle Garrigues (then Asst D.A.), and Margo Savell (wife of the Chief Judge for the Fourth Judicial Circuit). These testimonials, culled from thousands of investors, were designed to persuade DCED from vigorously investigating the investments.
Hompesch wrote Ed Watkins on February 9, 1993, about the World Plus investments in response to Watkins' stated concerns over the investment program. In his letter Hompesch enclosed a list of investors and the investment balances Hompesch stated his understanding that this list of active investors and the outstanding balances had not changed since the November 17, 1992 letter. See Letter of February 9, 1993, a copy of which is attached as Exhibit 51. Hompesch corrected this statement by letter dated February 26, 1993, in which attached a revised list showing 17 contracts coming due in March 1993 for a total of $280,000. See Letter of February 26, 1993, a copy of which is attached as Exhibit 53. Hompesch also provided a schedule of contracts that had been paid since September 1992 which indicated $285,000 had been paid to 21 investors. Id.
In March 1993, Hompesch submitted World Plus' application to offer exempt securities to the Alaska DCED. A copy of the March 3, 1993 letter is attached as Exhibit 54. Hompesch states: "Assuming that all prior sales have been resolved to your satisfaction and that all investors are paid in full, World Plus, Inc. would like to begin selling new contracts on March 15, 1993 totalling approximately $300,000." Id. Hompesch enclosed a Notice of Exempt Offering for World Plus to raise up to $500,000 through contracts bearing 20% interest which would be limited to no more 25 Alaska residents. Id.
Hompesch's assurances that no new investments occurred after November 1992, and that all investments had been paid were not accurate. The trustee has found debtor's files over 6,000 individual investment contracts, of which about 2,000 were outstanding when this bankruptcy case was filed. Compton Affidavit, ¶ 63. Many of the contracts exceeded $10,000 and the total face value of the outstanding contracts is well in excess of $25,000,000. Though the trustee is still compiling the investment contracts prior to April 1993, there were at least 18 investment contracts for an additional $500,000 entered into between September 1992 and March 1993. See Compton Affidavit, ¶ 78; Exhibit 48. Not by coincidence, Bonham opened up the FNBA account on February 24, 1993, and deposited $560,500 into the FNBA account and $352,967 for a total of $913,467.50. See Compton Affidavit, ¶ 31 and 69, Exhibits 12 and 34.
The total cash flow through the enterprise was far in excess of anything which can be supported by the limited investment volume promised to Mr. Watkins. The trustee's analysis of the known bank deposits in the names of Bonham, World Plus and Atlantic Pacific (see below) shows that an aggregate of $48,818,996.22 was deposited in the accounts between January 1990 and December, 1995. A summary of deposits and payments for World Plus and Atlantic Pacific is attached as Exhibit 34. Of this total, almost $40 million was deposited between 1993 and 1995. Id. This does not take into account the cash which was transferred from one investor directly to another when Bonham directed an investor to make his or her check payable directly to another. See Compton Affidavit, ¶ 76, Exhibit 70. The full dimensions of these transfers have not been calculated and may never be known. What is clear, however, is that Bonham, with the knowing or unknowing assistance of some of her investors, seriously misled the Alaska investigators.
Atlantic Pacific Enters the Scene as an End Run Around the Alaska Investigation
In an effort to avoid the scrutiny placed on her investments by Alaska, Bonham sought to evade the Alaska securities registration process by creating another corporate shell. On September 21, 1992, Irma D. Butler, a customer service coordinator for Laughlin Associates, Inc., incorporated Atlantic Pacific Funding Corporation in Nevada. Compton Affidavit, ¶ 30. On October 30, 1992, Jack C. Mellor signed the earliest investment contract with Atlantic Pacific Funding Corporation presently known for a 50% return in 6 months. A copy of the Mellor investment contract is attached as Exhibit 36.
On February 24, 1993, Bonham opened Account No. 2510 194 0 in the name of Raejean Bonham dba Atlantic Pacific Funding Corporation with the First National Bank of Anchorage (the FNBA Account). See Statement of March 1993, a copy of which is attached as Exhibit 12. The initial deposit was a check in the amount of $5,000 drawn on World Plus, Inc.'s Key Bank Account No. 125200879. Id. The statements changed in November to list the account under Atlantic Pacific Funding Corp.'s name only. Id. However, at least by March 1995, Bonham was using a deposit stamp that read:
Exhibit 41.
Bonham's relationship to the formation and acquisition of Atlantic Pacific is unclear pending further discovery. Bonham's first known direct contact with the corporation was on February 19, 1993 when she signed a Nevada Headquarters Program or Contract Office Service Package with Laughlin Associates to provide corporate services, a copy of which is attached as Exhibit 13. On March 19, 1993, Bonham completed a corporate profile for Atlantic Pacific to be submitted to Laughlin Associates. See Exhibit 14. Three days later, George Johnson signed a bill of sale on Atlantic Pacific letterhead acknowledging receipt of $1,000 from Atlantic Pacific Funding Corp. for payment "in full for the purchase of this corporation from Raejean Bonham." A copy of the Bill of Sale is attached as Exhibit 16. Bonham signed an Application for Business License for Carson City on behalf of Atlantic Pacific on April 16, 1993. A copy of the Application for Business License is attached as Compton Exhibit 15. On May 6, 1993, Carson City issued a business license for "Raejean S. Bonham Atlantic Pacific Funding, Inc." effective through December 31, 1993. A copy of the Business License is attached as Exhibit 17.
A List of Officers and Directors (List) was sent to Laughlin Associates on or about September 15, 1993. A copy of the List of Officers and Directors is attached as Exhibit 18. The List states that Charles Ferrara was the sole officer of Atlantic Pacific and did not list any directors. Id. On October 1, 1993, however, Bonham signed a Consent to Action without Meeting of the Shareholders of Atlantic Pacific Funding Corporation to remove Ferrara as a director. A copy of the Consent to Action without Meeting of the Shareholders of Atlantic Pacific Funding Corporation is attached as Exhibit 21. In August 1994, Bonham forwarded another List identifying her as president, secretary and treasurer, but did not disclose the directors of the corporation. The address of the corporation is Laughlin Associates' address: 2533 N. Carson #1185, Carson City, NV 89706, the same address used for World Plus. A copy of the August 1994 List of Officers and Directors for Atlantic Pacific Funding Corporation is attached as Exhibit 20. Again, there is no documentation regarding the issuance of stock to Bonham, as to how the corporation was capitalized, or what assets were transferred to it. Compton Affidavit, ¶ 37.
Atlantic Pacific never qualified to do business in Alaska as a foreign corporation, although its operations were conducted from Fairbanks. Compton Affidavit ¶ 38. It had no employees, or at least no employees separate from World Plus. Id. at ¶ 39. Atlantic Pacific had no office in Nevada, and had no offices anywhere separate from World Plus. Id. Its mailing address was a post office box in Carson City, though any mail was forwarded to PO Box 10245, Fairbanks, AK 99710, Suite 1185. Id. at ¶ 14. Bonham directed that mail be forwarded to her on a daily basis. Id. As to phone calls, Raejean instructed Laughlin Associates to take messages and inform the caller that she was "currently out of the office." Id. She also instructed that all phone calls "should be taken care of by me." Id.
In her Application for Delivery of Mail Through Agent, submitted through Laughlin, Bonham described Atlantic Pacific's business as "travel." Id. However, Atlantic Pacific never engaged in the sale of frequent flier tickets. All sales of tickets were undertaken in the name of World Plus. Compton Affidavit ¶ 55. Rather, Bonham immediately began to use Atlantic Pacific to divert the vast amounts of investment money coming into World Plus. In the first full month the FNBA account was opened, Bonham deposited $560,500, and paid $314,104.01. See Exhibit 34. The next month, she deposited $447,000 into the account, while paying $582,036.52. Id. However, Atlantic Pacific's investment contracts were for durations of six to eight months. Compton Affidavit., ¶ 59. There should have been no investment obligations for APFC to pay until August and November, 1993. The earliest Atlantic Pacific investment contract discovered to date was dated October 30, 1992 and matured on May 5, 1993. Exhibit 60, Exhibit 36.
While a review of the debtor's finances is ongoing, it is clear that transfers were routinely made from World Plus accounts to Atlantic Pacific. For the years ending December 19, 1993, 1994, and 1995 World Plus directly transferred the following amounts to Atlantic Pacific's FNBA account:
| Payor | Payee | Period | Amount |
| World Plus | Atlantic Pacific | 2/23/93-12/31/93 | 197,000 |
| World Plus | Atlantic Pacific | 1/1/94-12/31/94 | 1,436,500 |
| World Plus | Atlantic Pacific | 1/1/94-12/20/95 | 2,200,500 |
| TOTAL | 3,833,000 |
See Compton Affidavit. ¶ 62, and Exhibit 37.
The above chart of transfers does not account for the number of checks made payable to World Plus that were directly deposited into the APFC account. A quick review of the investors' checks the trustee has obtained to date that were deposited into Atlantic Pacific's FNBA account show numerous investment checks made payable to World Plus. See Compton Affidavit. ¶ 63, and Exhibit 38.
As can be seen, the finances and investments of World Plus and Atlantic Pacific were hopelessly commingled. Indeed, the distinctions between World Plus and Atlantic Pacific were not made to the investors of World Plus. Investors were routinely rolled over from World Plus contracts to Atlantic Pacific contracts then back to World Plus without explanation. See Exhibit 39. The trustee has not discovered any written explanation to show the basis upon which World Plus investors were rolled into Atlantic Pacific investment contracts when their World Plus contracts matured. Compton Affidavit, ¶¶ 44 and 66.
As mentioned above, from its inception Bonham used the FNBA account to pay World Plus contracts. Moreover, communications to investors appear designed to confuse and mislead, rather than to inform. Bonham sent notices to her investors informing them that an investment was maturing on letterhead for "World Plus Atlantic Pacific Funding Corporation." See Notice to Phyllis Lassin (Bullion), Chris Parkan, Jack or Morna Mellor, copies of which are attached as Exhibit 24.
On November 17, 1993, James Burns, Securities Investigator, Idaho Department of Finance, wrote to Raejean Bonham requesting information regarding Bonham's solicitation of investments in Idaho. See Letter dated November 17, 1993, a copy of which is attached as Exhibit 56. Bonham responded to the request for information on December 21, 1993 on Atlantic Pacific letterhead, sending names of Idaho investors in Atlantic Pacific. See Letter dated December 21, 1993, a copy of which is attached as Exhibit 57. She explained her business as buying large blocks of frequent flier miles. Id. She also explained that all lenders were Alaska residents when they first invested, but some later moved to Idaho. Id. The investors she identified were: Robert Beeson (c/o Chuck Joy), John Davidson, Howard Hall, Sherman Hart (c/o John Hart), Betty Jordan, Al Knapp, Donna Kreiensieck, and Niki Leclair. (State file 0124). Once again Bonham convinced her Idaho investors to write letters of support for Atlantic Pacific. See letters dated January 10-12, 1994, copies of which are attached as Exhibit 58. On January 20, 1994, Bonham, on Atlantic Pacific letterhead, responded to Burns' request for information on the investment contracts. She again stated that she never solicited investments in Idaho. Rather, according to her, people contacted her to invest, to see if there was an "open slot." To explain her business, she wrote:
Atlantic Pacific Funding Corporation is my company I use to buy blocks of airline miles from large corporations at a cheaper price and World Plus is my travel company which sells airline tickets to the public. We sell those tickets at a much higher price that what we purchased them for, enabling us to pay the interest to my investors.
See letter dated January 20, 1994, a copy of which is attached as Exhibit 59. Bonham also attached a list of Alaska attorney investors, including: Richard Ray, Ken Roosa, John Rosie, and Lance Parrish. Id.
On February 9, 1994, Bonham acted to blunt the effect of the Idaho investigation. As she had done after the Alaska DCED investigation, Bonham wrote to her investors. Bonham sent a letter on Atlantic Pacific letterhead regarding registration to offer securities in states other than Alaska and Nevada. (Milton file - Indiana). Specifically, Bonham informed her investors:
World Plus, Incorporated and Atlantic Pacific Funding Corporation are registered with the states of Alaska and Nevada only. The charge to register a company is $1,200.00 per state per year. In order to receive the high rate of return on your investments it is crucial that we operate with a very low overhead. Therefore, we will not spend the money to get registered in every state in which we have an investor.
If you need to use the money you have in the programs as collateral for a loan DO NOT fill out any information on a loan application without speaking to me first. Do not give out any information to anyone regarding your investment(s)at any time. Each time someone fills out a loan application or other paperwork with their investment information it is a potential problem. Several people see this information and it is only natural that they would wonder about this investment program.
See Letter dated February 9, 1994, a copy of which is attached as Exhibit 23.
James Burns informed Bonham on February 3, 1994, that the Nevada corporation department records showed someone else as the president, secretary and treasurer of Atlantic Pacific. See letter dated February 3, 1994, a copy of which is attached as Exhibit 60. On February 16, 1994, Cumer Green, Bonham's Idaho counsel, responded to James Burns, enclosing a recent filing in Nevada to revise the officers and directors to show Bonham as the president, treasurer, and secretary, as well as sole director. See Letter dated February 16, 1994, (Exhibit 61). Green explained that there was an oversight and Bonham's omission from the biennial report was just a housekeeping item that needed to be done. Id. Approximately, a week letter Ed Watkins, Alaska DCED, wrote to Bonham's Alaska counsel, Daniel Winfree, to inform her that World Plus' exemption from registration for World Plus would not be renewed unless the Idaho securities investigation was resolved. See Letter dated February 24, 1994, (Exhibit 62).
The State of Idaho concluded its investigation on April 5, 1994 when the Idaho Securities Bureau (Department of Finance) issued its Findings against Raejean Bonham, World Plus and Atlantic Pacific Funding Corporation regarding the sales of unregistered securities by unlicensed sales persons and disclosure violations per settlement agreement. A copy of the Idaho Securities Bureau's Findings which is attached as Exhibit 73.
After the conclusion of the Idaho investigation, Hompesch wrote to Lawrence Carroll regarding World Plus' Notice of Exempt Offering. See Letter dated May 24, 1994 from Richard Hompesch, a copy of which is attached as Exhibit 63. Hompesch again enclosed a proposed Notice of Exempt Offering, a copy of the Agreement and Order of Idaho investigation and an affidavit from Raejean stating that all the Idaho investors had been paid in full. Id.
Lawrence P. Carroll responded to Hompesch's letter on June 6, 1994. Letter from Lawrence P. Carroll to Richard Hompesch, a copy of which is attached as Exhibit 64. Under the agreement, Carroll agreed to permit World Plus to offer exempt securities, but World Plus was required to file a report on September 15, 1994, and every three months thereafter. Id. Additionally, Carroll wrote:
Please understand that we are concerned that the limitations imposed by the Statutes are observed, and that there be no commingling of funds from other entities or other jurisdictions.
Please note, as well, that the exemption at AS 45.55.140(b)(5)(B) is limited to Alaska residents only.
Id.
Hompesch acknowledged and accepted the State of Alaska's conditions by letter on June 16, 1994. A copy of the June 16, 1994 letter from Richard Hompesch is attached as Exhibit 65. Again, this did not deter Bonham, as she continued to bring in new investors, through both Atlantic Pacific and World Plus.
Bonham managed to bring in investors throughout 1994 and 1995 while all the time appeasing the Alaska DCED by assuring the Department that she limited investments to less than a total of $250,000 spread among no more than 25 investors, all of whom resided in Alaska. In August 1995, Bonham opened up a Account No. 102-8281 with Denali State Bank. A copy of the initial bank statement is attached as Exhibit 42. The name of the account, according to the bank statements was "World Plus, Inc, dba Atlantic Pacific Funding." Id. Additionally investment income was endorsed with a deposit stamp that read "World Plus Inc. dba Atlantic Pacific Funding." See Exhibit 43.
In October 1995, Bonham opened a cash management account with Merrill Lynch Pierce Fenner & Smith, Account No. 28H-07015. Raejean requested that the account be set up as "World Plus, Inc. dba Atlantic Pacific Funding Corp." Merrill Lynch refused and required Bonham to choose one or the other. Bonham opened the account in the name of World Plus. However, her checks on the account still read "World Plus, Inc. dba Atlantic Pacific Funding Corp." See Check No. 1001 dated November 20, 1995 to Dean and Heidi Haller, a copy of which is attached as Exhibit 45.
Raejean also began to place investments into her personal account with her husband Steve Bonham, Key Bank Account No. 75019140. In the months of September and October, 1995, Raejean deposited a total of $502,185.00 into the account. See Key Bank Personal Checking Statement dated October 9, 1995, a copy of which is attached as Exhibit 46. For the two months prior to September, she had deposited a total of $10,088.91. The money did not stay in the account for any period of time as by the end of November, the account had a negative balance of $3,651.64. Id.
| July | August | September | October | |
| Deposits | 1,379.91 | 8,709.00 | 193,108.05 | 309,076.95 |
| Withdrawals | 0.00 | 0.00 | 56,000.00 | 42,025.00 |
| Checks Paid | 479.76 | 8,321.45 | 135,029.99 | 270,703.59 |
| Deposits less deductions | 900.15 | 387.55 | 2,078.01 | ( 3,651.64) |
In December, 1995 Bonham's house of cards collapsed, as it inevitably would, when investors filed state collection actions on the investment contracts in Fairbanks Superior Court. On December 6, 1995, Joe Sheehan filed O'Rear v. World Plus, Inc., 4FA-95-2916 Ci. Two days later John R. Hiltenbrand, Jr. filed suit against World Plus and Raejean Bonham. Case No. 4FA-95-2979 Ci. Jerry, Jay, and Nancy Sadler also sued World Plus and Bonham in Case No. 4FA-95-2935.
On December 19, 1995, Ken Lougee filed an involuntary Chapter 11 petition (Involuntary Petition) against Raejean Bonham, aka Jeannie Bonham, aka Jean Bonham on behalf of several creditors. A copy of the Involuntary Petition is attached as Exhibit 1. Originally, Lougee had specifically included World Plus as debtor, but scratched it out and hand wrote the words "dba World Plus" onto the caption. Id. In indicating the nature of the debtors Lougee marked both "personal" and "other," and hand wrote the words "dissolved corporation." Id. The Petition indicates that the debts are primarily business debts. Lougee filed on behalf of Victor and Patricia Rentschler, Sylvia McCormick, and Dale Yoder, each of whom asserted they were creditors by virtue of an investment contract. See Investment Contracts of Victor and Patricia Rentschler, Sylvia McCormick, and Dale Yoder, copies of which are attached as Exhibit 2.
A day after the involuntary petition was filed, the Court held a hearing on Ken Lougee's motion to appoint an interim trustee. Bonham was represented by Warren Taylor during the hearing, though he stated that he would not be representing her in the bankruptcy process. During the hearing Judge Ross asked for particulars regarding the assets of the estate. Taylor identified the house and boat as the only personal assets. See Exhibit 67, p. 9. The court then asked about "the corporation" referring to World Plus, Inc. and whether it was still operating as a corporation. Id. at 9-10. Taylor replied that it had been dissolved, though he thought someone was trying to reinstate it. Id. The court then proceeded to inquire about the "business." Taylor described the "debtor's business" as purchasing large blocks of frequent flier miles to resell to the public. Id, at 12.
The court asked for evidence from the petitioning creditors. Dale Yoder testified that he had invested with World Plus and Raejean Bonham, as did R.T. Rentschler. Id. at 16, 21. At the end of the hearing, the court asked Raejean if it was necessary to find new investors to continue "the business." Id. 37. After conferring with Raejean off the record, Taylor answered that new investors were needed, thereby reinforcing the impression that, notwithstanding Bonham's protests to the contrary, the enterprise was a Ponzi scheme. Id. The court noted that it was hard to understand what were the assets of the estate and made several references that there were "red flags" in the case, not the least of which was "that the corporation has recently expired." Id. at pp. 29, 32. All of this supported the appointment of a trustee for at least a short duration to seize control of the business and make an investigation. The court appointed Larry Compton as interim trustee to continue the business and make an investigation. Id. at 37-39.
On January 2, 1996, Raejean filed a pro se Response to Involuntary Petition, a copy of which is attached as Exhibit 3. In her Response, Raejean agreed that she was the owner of World Plus. She referred to herself as "Raejean Bonham dba World Plus (hereinafter "Raejean Bonham)...." Id. at 2. She went on to discuss the cases filed against "Raejean Bonham" through she identified them by their case captions as actions against World Plus. Id. She contested the petition on the basis that the investment contracts submitted in support of the petition were not due, and concluded that the amount allegedly owed by World Plus and Raejean Bonham was a gross miscalculation at that point. Id. She also estimated that World Plus was in arrears in the amount of approximately $450,000. Id.
On January 5, 1996, Raejean Bonham filed a voluntary Chapter 11 petition listing as debtors herself, Atlantic Pacific Funding Corporation, and World Plus, Inc. See Voluntary Petition dated January 5, 1996, Case No. F-96-00013 HAR, a copy of which is attached as Exhibit 4. Debtors' business was described as: "Airline coupon broker. Purchase airline miles, repackage & sell as tickets." Id.
The Court scheduled a trial on the involuntary petition for January 8, 1996. A number of matters were set that day concerning the involuntary action and the voluntary petition. The Court prefaced its remarks at the hearing by stating that he saw the bankruptcy as an opportunity to stop the rush of creditors from "picking over the bones of World Plus." See Exhibit 68, at p. 6. The Court informed the debtor that the filing of the voluntary Chapter 11 essentially admitted the involuntary action, but the trustee wanted to keep the earlier date for transfer avoidance purposes. Id. at 3. The Court stated that even if the Debtor's new filing was recognized, he would require the cases to be consolidated or managed in such a way as to preserve the earlier filing date of December 19, 1995. Id. at 8. The Court asked Raejean if she wanted to consent to the petition. The debtor agreed to the involuntary petition and to the December 19 date for avoidance purposes, and she moved to convert the case into a voluntary Chapter 11 proceeding with a trustee to be appointed. Id. at 9. On January 8, 1996, the court dismissed Case No. F96-00013 HAR. Exhibit 5.
After the order for relief on the involuntary petition, the Debtor converted the case to Chapter 11 with a trustee appointed. Exhibit 6. Thereafter, the trustee promptly moved to convert to a Chapter 7. A hearing on this motion was held on January 29, 1996. At the conclusion of the hearing, the Court granted the trustee's motion to convert the Chapter 11 proceeding to a Chapter 7 based upon its conclusion that there was no prospect of reorganization in large part because the operation appeared to be a Ponzi scheme in which Bonham used new investors to pay off existing investors. Since then the trustee has liquidated the assets which were readily available and engaged in an extensive and ongoing analysis of the financial history of Bonham and her entities, as a result of which many avoidance actions have been filed. There will not be any dividend for creditors unless these actions are successful.
Defendants in the Bonham Recovery Action have questioned the trustee's standing to sue the investors whose contracts Bonham nominally issued in the names of World Plus and Atlantic Pacific. They argue that Bonham is the sole debtor in this bankruptcy case, and the trustee is without standing to pursue avoidance claims for payments Bonham caused to be made through World Plus and Atlantic Pacific. Thus, the first issue raised by the objecting avoidance defendants is who is the debtor in this case, and what is the scope of the estate? As conducted by the trustee, this bankruptcy proceeding has always been maintained and administered to include all investment contracts, whether issued by World Plus or Atlantic Pacific. Approximately 1,100 creditors with Atlantic Pacific and World Plus contracts have filed proofs of claim. At the outset of the case, the Court determined that the nominally corporate assets were part of the bankruptcy estate and should be administered together with the individual assets.
The trustee also believes that the separate existence of World Plus and Atlantic Pacific is so gossamer that they are not entitled to this Court's recognition as distinct entities. Bonham's estate should include all nominally corporate assets. If World Plus and Atlantic Pacific are separate debtors in this action, they may be entitled to separate administration of their estates absent substantive consolidation. Because the abuse of the corporate forms was so complete, and their only use was to perpetuate a fraud upon Bonham's investors, however, substantive consolidation is appropriate. As discussed below, substantive consolidation is appropriate even if the court finds that World Plus and Atlantic Pacific are not part of the present bankruptcy. Regardless of the mechanism employed, the court should not allow Bonham to perpetuate the fraud committed in establishing the corporations and using them to further her Ponzi scheme.
Finally, if the court concludes that World Plus and Atlantic Pacific are not presently debtors in the bankruptcy, but consolidates the estates, then it is necessary to establish the applicable date for the trustee's avoidance actions. Given the facts of the case, the trustee asks the Court to rule that December 19, 1995, the date of the Involuntary Petition, is the applicable date.
The Court has in Effect Ruled that World Plus and Atlantic Pacific are de facto Debtors in this Action, and the Debtor is Estopped to Maintain the Contrary.
Joint Administration is the Law of this Case.
The doctrine of law of the case prevents parties from relitigating facts and issues previously decided by the court. Arizona v. California, 460 U.S. 605, 618, 103 S.Ct. 1382, 1391, 75 L.Ed. 2d 318 (1983) ("that decision should continue to govern the same issues in the same case.") The doctrine precludes relitigation of only those things previously determined. But, "it is clear that it 'comprehends things decided by necessary implication as well as those decided explicitly." United States v. White, 846 F.2d 678, 684 (11th Cir. 1988) (quoting Dickinson v. Auto Center Manufacturing Co., 733 F.2d 1092, 1098 (5th Cir. 1983)(emphasis in original)); see also Thomas v. Bible, 983 F.2d 152, 154 (9th Cir. 1993) (law of the case includes those issues decided by necessary implication).
The Court entered its Order for Relief and Voluntary Conversion to a Chapter 11 on January 8, 1996, after conducting a hearing on the relationship between the Involuntary Case and the Voluntary Case. A copy of the Order for Relief and Voluntary Conversion to a Chapter 11 is attached as Exhibit 6. Though the Order for Relief speaks of a single debtor, the caption makes clear that the debtor is Bonham dba World Plus. Id. Additionally, the Order for Relief converted the case to Chapter 11. The history of the case to that point reveals that there was nothing to put into a reorganization other than the debtor's frequent flier/investment business.
The Involuntary Petition, which stated that the debtor was Raejean Bonham dba World Plus, was filed on behalf of creditors holding investment contracts issued by World Plus (Exhibits 1 and 2). The Involuntary Petition further indicated that the bankruptcy involved business debts and a dissolved corporation (Exhibit 1 at 1). The trustee's involvement in this action began on December 20, 1995 as a result of a hearing on a Motion for Appointment of Interim Trustee filed by Ken Lougee representing investors in World Plus. Ms. Bonham participated with counsel at the December 20, 1995 hearing. Compton Affidavit ¶ 5. Obviously, there was no need to appoint a trustee at that stage, prior to the order for relief, to administer her personal non-business assets. Rather, the application was directed to operating World Plus, and making an investigation of the business with a view to evaluating any prospects for reorganization should the case be converted to a Chapter 11. With Bonham's consent, the trustee seized control of World Plus, but also effectively exercised control over Atlantic Pacific, its records and the investments coming to it.
At the December 20 hearing, the Court discussed with the trustee what initial actions he would take if appointed. Exhibit 67, at 31-36. Mr. Compton advised the Court that he would attempt to review and understand the business records so he could recommend whether the business should be operated or shut down and liquidated. Id. Mr. Compton requested and received authority to operate the business if he thought that operations were appropriate. Id.
Bonham filed a Request for Clarification of Order for Appointment of Interim Trustee on January 5, 1996. A copy of the Request for Clarification is attached as Exhibit 7. The thrust of the motion is Raejean's dissatisfaction with the trustee's operation of the "business." In her pleading, Bonham acknowledged that Compton was appointed on December 20, 1996 to operate the business. She stated:
World Plus and Raejean Bonham can not pay back creditors without the continuation of current and existing contracts which exist between World Plus and ticket agents, thus doing a incredible economic damage to World Plus. World Plus, as a business in order to satisfy creditors, or World Plus and Raejean Bonham will continue to be damaged both financially and in name.
Id.
While Atlantic Pacific was not mentioned at either the December 20, 1995 or January 8, 1996 hearings, it was addressed at the hearing on the trustee's Motion to Convert Case. During her testimony in the hearing on that motion on January 29, 1996, the Court asked Bonham how Atlantic Pacific impacted the assets available to fund her potential reorganization. The Court asked:
Q Mm hmm(affirmative). And is Atlantic Pacific Funding -- tell us about how that would change the picture? Is there --
A Well, Atlantic Pacific Funding runs the corporation that I used, that we purchased miles through, World Plus, the company that I sold the airline tickets out of.
* * * Q Are you telling us that Atlantic Pacific Funding was the one that purchased the tickets -- purchased the miles?
A That's my company that we purchased miles through? Yes.
Q Okay. In the contracts that I've seen, most of the contracts, it seems to be transactions between people that invested or loaned money to World Plus and World Plus -- I don't recall seeing Atlantic Pacific as a party to this contract. And I might have missed them, but --
A Well, the con -- there is -- there's
Q -- were the --
A -- contracts that were un- -- that -- the contracts were Atlantic Pacific Funding. The contracts --
Q What I'm saying is the ones that I've seen all seem to be World Plus contracts. Did you deal with your investors as Atlantic Pacific Funding?
A Yes. They -- they have contracts with Atlantic Pacific Funding.
See Transcript of January 29, 1996 hearing on Motion to Convert, pp. 51-52, a copy of the pertinent pages of which is attached as Exhibit 69.
Shortly after the conversion of this case to Chapter 7, the debtor filed a pleading styled Motion for Clarification of Case which asked this court for "clarification as to the status of the above bankruptcy matter in regards to specifically which entities are in bankruptcy." Exhibit 74. Debtor's purpose in filing the motion had nothing to do with Bonham Recovery Actions, but instead had a much more mundane purpose: Debtor stated that "This request is necessary in that Debtors [sic] personal phones were disconnected when the Trustee had World Plus phones disconnected on February 2, 1996, and personal items were taken by the Trustee from World Plus Office. [sic]" Id. at 2.
Interestingly, then, Bonham's February 9, 1996 motion assumed (correctly) that the bankruptcy action included the dissolved corporation World Plus; her question was whether the case included only the corporation or whether it included the dissolved corporation as well as herself. This is precisely the opposite of the position that she (and investors who are her mouthpiece) now assert.
The Court responded to Bonham's February 9, 1996 motion in an Order Denying Various Motions Filed by Debtor, docket #210 and Exhibit 77. The court ruled on her motion as follows: "DENIED (seeks an advisory ruling). Id. at 2. On March 18, 1996, debtor filed a Request for Reconsideration of Order Denying Motion for Clarification of Case in Regards to Specifically Which Entities are in Bankruptcy. Exhibit 78. That pleading states in substantive part:
Debtor did not seek an advisory ruling from this Court, but rather to clarify specifically which entities were in bankruptcy, to include whether Raejean S. Bonham was personally in bankruptcy, and for this Court to state its jurisdiction and subject matter authority over Raejean S. Bonham personally, and who [illegible] specifically placed Raejean S. Bonham in bankruptcy. Debtor seeks not advice, but requests of this Court to submit its authority over Raejean S. Bonham personally, as distinct from World Plus.
Id.
In other words, Bonham was telling this Court, "Judge, I agree that the corporation is in bankruptcy; but I don't think that I am personally in bankruptcy and if you disagree I'd like you to tell me why."
The Trustee, through James D. DeWitt, Esq., filed a Response to Request for Reconsideration of Order Denying Motion for Clarification of Case in Regards to Specifically Which Entities are in Bankruptcy. Exhibit 79. Mr. DeWitt among other things pointed to debtor's sworn testimony at the Section 341 meeting and the Rule 2004 examination of Bonham, wherein she stated several times, "I am World Plus." Id. at 2. The Court denied the Motion for Reconsideration on April 10, 1996, docket #398, and stated as follows with regard to the motion under discussion: "DENIED. Explanation: It is apparent that Raejean Bonham, the debtor in this case, in personal chapter 7 bankruptcy." Exhibit 80.
There is some irony, even humor, in the interpretations to which this order is now being subjected. Placed in context, it is crystal clear that, in February through April, 1996, when the foregoing series of pleadings were filed, both the debtor and the trustee regarded the dissolved corporations as being in bankruptcy. The only question was whether Raejean was also personally in bankruptcy. The Court, in effect, answered, "Of course you are." Now, debtor and some of the investor creditors are trying to argue that when the Court said that debtor was in personal bankruptcy, the Court intended with a single sentence to unravel the assumption that everyone agreed upon; i.e., that the dissolved corporation was the centerpiece of this bankruptcy case.
It is interesting to note, that the trustee, as the owner of 100% of the stock of both corporations, could have filed separate Chapter 7 petitions for each of them at any time. Had he done so, the actions he would subsequently have taken would have been no different from the actions which were in fact taken, as the trustee has proceeded from the inception as if the corporations were part of the unified estate.
The initial appointment of a trustee whose focus was to be on World Plus, and who received Court authority to operate World Plus if appropriate, was a de facto order directing joint administration of Bonham's estate and World Plus, to the extent that there was any meaningful separation of the two. This joint administration was confirmed by the Court's subsequent conversion of the case to Chapter 7, at which time no changes were directed to the method of administration which had been conducted up to that time.
The Court and all parties have been aware from the outset that the trustee has administered this case to include the assets and liabilities of Bonham and the corporations. See Exhibit 67, pp. 9-10. The Court approved this action when it dismissed the subsequently filed voluntary case as, in effect, a surplus and irrelevant proceeding after the January 8 hearing. The trustee asserts that the case has always included World Plus, and must also include Atlantic Pacific since, as is set out more fully below, the trustee has been unable to find a meaningful distinction between the assets, liabilities and business of the nominal corporations. Thus, the de facto joint administration of the Bonham, World Plus and Atlantic Pacific estates has been the law of this case since inception.
Bonham and the Investors are Estopped to Deny that the Corporations are Part of the Bankruptcy Case.
To the extent that Bonham and the investors intend to deny that her corporations are included within the bankruptcy proceeding, they are estopped from doing so. Judicial estoppel has long been applied to preclude a party from asserting inconsistent positions. See Rissetto v. Plumbers and Steamfitters Local 343, 92 F.3d 597 (9th Cir. 1996) (plaintiff asserted that she was unable to work as part of prior application for workers compensation temporary total disability benefits); Lowery v. Stovall, 92 F.3d 219 (4th Cir. 1996); Wright v. State, 824 P.2d 718 (Alaska 1992) (failure to disclose potential lender liability claim as asset of bankruptcy estate barred later lender liability claim). Given Bonham's repeated statements and actions, and the participation of World Plus and Atlantic Pacific investors, the Court should enter an order making express what has previously been taken for granted: that World Plus and Atlantic Pacific are co-debtors in this bankruptcy proceeding.
In In re Reider, 31 F.3d 1102 (11th Cir. 1994), the debtors, a husband and wife, owned a horse breeding business which had entered into a contract to purchase a horse. To purchase the horse, the corporation obtained a loan, but the lender required the husband to personally guaranty the loan. The loan application listed the farm used for the horse business as a personal asset. When the corporation defaulted, the lender sought to recover against the husband on his guaranty. As a result he, and his wife, filed Chapter 11, which was ultimately converted to Chapter 7. The Chapter 7 trustee sold the farm. However, the court determined that the wife owned as a result of an inheritance from her mother.
The FDIC, as successor in interest to the lender bank, sought the sale proceeds. The FDIC argued that the trustee had substantively consolidated the case by intermingling funds, failing to break out the separate assets and liabilities of the case, and intermingling the assets and liabilities of the two debtors. The FDIC also relied on statements made by the debtors' attorney during a bankruptcy court hearing that the debtors' property was being treated as joint property. While holding that the designation of assets in the petition and counsel representation were immaterial in the case before it, the court noted:
However, under certain circumstances, representations of counsel and the manner of the conduct of litigation could operate to bar a party from raising an issue in an untimely manner.
Id. at 1111.
Unlike Reider, the instant case has been administered to include World Plus and Atlantic Pacific. Raejean Bonham is the named debtor in this action. However, the petition also includes World Plus as her dissolved corporation and "dba." There is no mention of Atlantic Pacific Funding, Corp. on the involuntary petition, nor was it mentioned in the hearings on December 20, 1995, or the trial on January 8, 1996. Ms. Bonham did not disclose the existence of Atlantic Pacific Funding Corp. Yet, Bonham also held 100% of the shares of Atlantic Pacific, which had also been involuntarily dissolved as of the petition date. Atlantic Pacific had no business other than the investment contracts, and to act as a funnel for paying World Plus investment contracts. Indeed, Bonham has admitted that she considered World Plus and Atlantic Pacific to be the same business. Compton Affidavit ¶ 21. See also Transcript of Rule 2004 Examination of Raejean Bonham, copies of the pertinent pages of which are attached as Exhibit 75.
The Court has administered the estate to include all investment contracts whether they were issued by World Plus or Atlantic Pacific. In an apparent effort to circumvent the involuntary proceeding Bonham filed her voluntary petition for herself and the two corporations though both had been dissolved at the time. Case No. F96-00013-HAR. Based on Bonham's express consent to the Involuntary Petition and appointment of a trustee, the Court dismissed the Voluntary Case and converted the involuntary bankruptcy to Chapter 11. Exhibit 5.
The investors have similarly participated under the assumptions that World Plus and Atlantic Pacific were part of the bankruptcy. Notice of significant events in the bankruptcy proceedings has always been given to the investor creditors of World Plus and Atlantic Pacific. As noted above, these are not mutually exclusive groups. Rather, investors have been given both World Plus and Atlantic Pacific contracts. Bonham would roll World Plus contracts into Atlantic Pacific contracts, and back again. See Summaries of Investment Histories attached as Exhibit 39. The end result is that there appears to be no Atlantic Pacific investment contracts issued after late 1994. However, World Plus investors continued to receive payments from Atlantic Pacific. Id. The investors of World Plus and Atlantic Pacific have filed numerous pleadings and statements in opposition to the Motion to Convert and the appointment of special counsel to pursue avoidance actions.
Since the involuntary petition filed by the investors of World Plus and Atlantic Pacific, the court has administered the bankruptcy to include World Plus and Atlantic Pacific. Raejean Bonham has expressly consented, in deed and word, to include World Plus and Atlantic Pacific in the bankruptcy. The creditors of World Plus, and Atlantic Pacific, have also participated under the same assumption. As recognized by the Eleventh Circuit in Reider, there are certain circumstances in which the debtors', or debtors' counsel's, statements may prevent them from taking a contrary position. Bonham, and World Plus expressly agreed to take the benefits of the bankruptcy petition, including the automatic stay to stop the increasing lawsuits being filed against them. Atlantic Pacific, to the extent it existed, received the same benefits, and was expressly included in the Voluntary Petition. Bonham's statements and actions should bind her to include World Plus and Atlantic Pacific in this bankruptcy proceeding. The investor's actions bind them as well. This court should enter an order confirming that World Plus and Atlantic Pacific are debtors in this bankruptcy which has been jointly administered to present. See In re Crabtree, 39 B.R. 718 (Bankr. E.D. Tenn. 1984) (creditors in involuntary bankruptcy allowed to amend caption to include alter ego of debtor and were not required to file separate involuntary petition). The Court should order that, to the extent that World Plus and Atlantic Pacific have any separate existence, their estates are to be jointly administered with Bonham's, effective as of the date of the Involuntary Petition.
The Court May Reopen the Voluntary Action and Substantively Consolidate the Cases
If the Court recognizes Bonham, World Plus, and Atlantic Pacific as truly separate entities, (which the trustee does not believe to be the case) they retain separate estates despite the corporations' dissolution. The estates persist whether the corporations are presently part of the bankruptcy proceeding. The trustee has already moved for reopening of the voluntary case, and now moves this Court to substantively consolidate the estates of World Plus and Atlantic Pacific into the Bonham estate under 11 U.S.C. § 105(a) and its equitable powers. Even if the voluntary case is not reopened, and even if World Plus and/or Atlantic Pacific are not debtors currently in bankruptcy, their estates may be consolidated with one another and with Bonham's.
The Court may administratively or substantively consolidate the estates of Bonham, World Plus and Atlantic Pacific. Joint administration is a "procedural tool permitting use of a single docket for administrative matters, including the listing of filed claims, the combination of notices to creditors of the different estates, and the joint handling of other ministerial matters that may aid in expediting the cases." Reider, 31 F.3d at 1109. On the other hand, substantive consolidation, "is no mere instrument of procedural convenience ... but a measure vitally affecting substantive rights." Flora Mir Candy Corp. v. R.S. Dickson & Co., 432 F.2d 1060, 1062 (2d Cir. 1970). Substantive consolidation is a creature of the bankruptcy court's equitable powers under 11 U.S.C. § 105(a). One court has analogized substantive consolidation to the merger of two corporations:
In place of two or more debtors, each with its own estate and body of creditors, substantive consolidation substitutes a single debtor, a single estate with a common fund of assets, and a single body of creditors. [cases omitted] Assets and liabilities of each entity are pooled and inter-entity accounts and claims are eliminated. Creditors of the separate entities become creditors of the consolidated entity. Duplicative claims by creditors, uncertain as to which debtor owes their debts, are eliminated. [Citations omitted].
In re Parkway Calabasas Ltd., 89 B.R. 832, 837 (Bankr. C.D. Cal. 1988), aff'd, 949 F.2d 1058 (9th Cir. 1991).
The Supreme Court long ago gave substantive consolidation tacit approval in Sampsell v. Imperial Paper & Color Corp., 313 U.S. 215, 61 S. Ct. 904, 85 L.Ed. 1293 (1941). As the court in In re Eagle-Picher Industries, Inc., 192 B.R. 903, 905 (Bankr. S.D. Ohio 1996) noted: "there is by this time no question that the bankruptcy court has the power to order substantive consolidation." As an equitable remedy, however, it is used cautiously "because of the possibility of unfair treatment of creditors of a corporate debtor who have dealt solely with that debtor without knowledge of its interrelationship with others." Reider, 31 F.2d at 1107 (quoting In re Flora Mir Candy Corp., 432 F.2d 1060, 1062-63 (2nd Cir. 1970)).
In this instance, substantive consolidation is appropriate to recognize the alter ego nature of Bonham, World Plus, and Atlantic Pacific. The overwhelming number of creditors of both corporations are the investors in Bonham's Ponzi scheme which was pursued through the alter ego corporations. Additionally, the investors indiscriminately invested through either World Plus and/or Atlantic Pacific and consolidation will not result in the unfair treatment of either corporation's creditors, assuming it were possible to tell with any specificity who is a creditor of which.
Nature and Test for Substantive Consolidation
The courts have developed two related, but slightly different tests for substantive consolidation. Under one test developed by the District of Columbia Circuit, and adopted by the Eleventh Circuit, the proponent of substantive consolidation must show: "(1) there is substantial identity between the entities to be consolidated; and (2) consolidation is necessary to avoid some harm or to realize some benefit." Eastgroup Properties v. Southern Motel Assoc., Ltd., 935 F.2d 245, 249 (11th Cir. 1991); In re Auto-Train Corp., Inc., 810 F.2d 270 (D.C. Cir. 1987). While under this test the proponent must establish both elements, a strong showing of one component may lessen the quantum of proof necessary on the other component. In re Reider, 31 F.2d 1102, 1112 (11th Cir. 1994) (substantive consolidation was not appropriate given "the weak evidence of substantial identity and the strong contrary evidence that the real estate was separate in fact and readily known to be, and in light of the strong balance of equities in favor of Mrs. Reider.") Id. at 1112. Once demonstrated, the burden shifts to any opponent to show: "(1) it has relied on the separate credit of one of the entities to be consolidated; and (2) it will be prejudiced by substantive consolidation." Id.
The Second Circuit has adopted a slightly different test in In re Augie/Restivo Co., 860 F.2d 515 (2d Cir. 1988). There, the court examines: "(1) whether creditors dealt with the entities as a single economic unity and did not rely on their separate identity in extending credit; or (2) whether the consolidation will benefit all creditors." Reider, 31 F.2d at 1108 (quoting Augie/Restivo, 860 F.2d 518). Unlike, the conjunctive test propounded in Eastgroup, the Second Circuit's test is satisfied if either component exists.
Courts considering substantive consolidation acknowledge and often discuss both tests, though they usually conclude that application of either test leads to the same result. In re Eagle- Picher Industries, Inc., 192 B.R. at 905 ("the alternative tests prescribed by the Reider court are not materially different, and, on the facts of the case now before this court, lead to the same result.") The Ninth Circuit has not addressed which test to apply. The bankruptcy courts in Idaho have applied the test adopted in Augie/Restivo. In re Stevenson, 153 B.R. 52, 53 (Bankr. D. Idaho 1993). However, the Bankruptcy Court for the Central District of California adopted the reasoning of Eagle-Picher, applied both tests. In re Standard Brands Paint Co., 154 B.R. 563, 571 (Bankr. C.D. Cal 1993). As in Standard Brands Paint Co., regardless of the test employed, the facts of this case requires substantive consolidation of World Plus and Atlantic Pacific with the Bonham estate. For this reason, the trustee will discuss substantive consolidation under both tests.
Application of Substantive Consolidation
The Eastgroup analysis first requires that there be a "substantial identity" among the parties to be substantively consolidated. Though it is not necessary to establish that the parties to be consolidated are alter egos, it is certainly sufficient to do so. While courts have not agreed on the elements necessary to support substantive consolidation, it has long been recognized that substantive consolidation is appropriate where the parties are alter egos of each other. In re Reider, 31 F.3d 1102 (11th Cir. 1994) ("disregard of corporate formalities and commingling of assets may indicate substantive consolidation is appropriate.) This follows from the recognition that there is a substantial identity between the debtors, with one entity exercising ultimate control over the assets and the other entities operating as mere instrumentalities."); In re 1438 Meridian Place, Inc., 15 B.R. 89 (Bankr. D.D.C. 1981); In re Tureaud, 45 B.R. 658 (Bankr. N.D. Okl. 1985), aff'd 59 B.R. (N.D. Okla. 1986) (substantive consolidation was appropriate where debtor created and dominated affiliate corporations); In re Standard Brands Paint Co., 154 B.R. 563 (Bankr. C.D. Cal. 1993); and In re Alpha & Omega Realty, Inc., 36 B.R. 416 (Bankr. D. Idaho 1984)(substantive consolidation was not appropriate where facts did not indicate that the corporation was the alter ego of the debtor). The court in In re Cooper, 147 B.R. 678, 683 (Bankr. D.N.J. 1992) similarly concluded that "[a]n alter ego relationship ordinarily weighs heavily in favor of both piercing the corporate veil and substantive consolidation." There, the court analyzed the differences between the proof necessary for substantive consolidation and piercing the corporate veil:
the factors which courts consider regarding substantive consolidation include the factors which courts consider regarding piercing the corporate veil, but there are additional factors which bear on substantive consolidation. This is undoubtedly in part because applications to pierce the corporate veil are typically two-or three party disputes brought by one creditor against one or two debtors, whereas applications for substantive consolidation require the bankruptcy courts to consider the interests of numerous parties including all creditors. Substantive consolidation is more extensive relief than piercing the corporate veil, because substantive consolidation is a complete merger of legal entities, while piercing the corporate veil is essentially a limited merger for the benefit of only one creditor or group of creditors.
It is safe to infer, however, that where the owners of a corporation have ignored the corporate form, courts of equity will be inclined to do so as well under both doctrines.
Id. at 684.
A year before the Supreme Court issued its decision in Sampsell, the Tenth Circuit consolidated the estates of a bankrupt parent corporation with its wholly owned subsidiary in Fish v. East, 114 F.2d 177 (10th Cir. 1940). The parent had created the subsidiary as its "mere instrumentality" to raise money for its efforts and shelter property from its creditors. The parent was placed into bankruptcy, and when the subsidiary was later placed into bankruptcy as well, the parent's trustee made claim for turnover of all property held by the subsidiary.
The Tenth Circuit did not discuss the concept of substantive consolidation, but accomplished the same result. It relied on the "mere instrumentality" rule, and concluded that the "[c]orporate entity may be disregarded where not to do so will defeat public convenience, justify wrong or protect fraud." Id. at 191. The Tenth Circuit affirmed the turnover of the subsidiary's property to the parent on the findings that the two corporations "are alter ego of each other, and constituted but one business enterprise, and that the [subsidiary] was organized and a lease made to it as lessee for the purpose of hindering and delaying creditors of the [parent]." Id. at 198.
In Matter of New Center Hosp., 187 B.R. 560 (E.D. Mich. 1995) the debtor was a corporation placed into Chapter 11 by the Internal Revenue System. The United States, on behalf of the IRS, filed an adversary action to substantively consolidate the bankruptcy estate with several non-debtor corporations that were formed and operated by members of the debtor's board of trustees, including Central City Health Services (CCHS) to whom the debtor transferred $1.2 million to acquire clinics to feed patients into the debtor. The court noted that: "[m]anifestly, consolidation is authorized when the affairs of the parties are so entwined as to make it impossible to administer them as separate entities." Id. at 567. The IRS showed in its motion for summary judgment that: (1) loan documents between debtor and CCHS were never drawn up; (2) CCHS never made any payments on the loan; (3) the clinics were controlled (ultimately) by the same person; (3) defendants "essentially" disregarded the corporate forms; (4) assets and operations of the clinics were commingled; (5) money was transferred wherever to meet needs as they arose; (6) money was transferred to avoid creditors; (7) continued even post petition. On appeal, the district court held that the bankruptcy court properly granted summary judgment on the issue of substantive consolidation based upon a sufficient identity amongst the entities under either Augie/Restivo and Eastgroup to warrant substantive consolidation. Id. at 569.
In the instant case, substantial identity between Bonham, World Plus, and Atlantic Pacific exists because they are alter egos of each other. Under Alaska law two distinct theories justify disregard of the corporate veil. As explained in McKibben v. Mohawk Oil Co., Ltd., 667 P.2d 1223 (Alaska 1983), courts may pierce the corporate veil where a shareholder "uses a separate corporate form 'to defeat public convenience, justify wrong, commit fraud, or defend crime." Id. at 1229 (quoting Jackson v. General Electric Co., 514 P.2d 1170, 1172-73 (Alaska 1973)). Alternatively, a shareholder may the corporate veil will be disregarded where the corporation is the "mere instrumentality" of its shareholder. Id. The court may disregard the corporate veils of World Plus and Atlantic Pacific under either theory given Bonham's total disregard and abuse of the corporate form, and use of it to perpetuate her fraud.
World Plus and Atlantic Pacific were Bonham's Mere Instrumentalities
The Alaska Supreme
Court has established the factors to be examined when evaluating
whether a corporation is being used by its shareholder as a "mere
instrumentality" in Uchitel Co. v. Telephone Co.,
646 P.2d 229 (Alaska 1982). Under Uchitel, courts look
to six factors when deciding whether the corporation is a mere
instrumentality of its shareholder. Id. at 235. The trustee
discusses each of the factors in turn.
The Shareholder Sought to Be Charged Owns All or Most of the Stock of the Corporation
Bonham completely dominated World Plus and Atlantic Pacific. She was the sole shareholder and director of both corporations. Exhibits 9, 19 and 20. She was the president, secretary and treasurer of both corporations, and her husband was the vice-president of World Plus. Id. Bonham has previously testified that her husband has never participated in World Plus, and that she was the one to cause him to be listed as the vice president of the corporation.
Perhaps more importantly, the corporations were part of a single scheme to defraud her creditors. Bonham originally operated the scheme though World Plus as her "dba" before incorporating in late 1991. She created or acquired Atlantic Pacific only when the State of Alaska began investigating her operation. Though created in name to be involved in the travel business, Atlantic Pacific's only function was to issue investment contracts and make payments to investors. After late 1994 and the conclusion of the Idaho investigation, Bonham reduced Atlantic Pacific to holding investment income from World Plus, and paying World Plus investors. Compton Affidavit, ¶ 66. Atlantic Pacific stopped issuing investment contracts, but continued to receive deposits and make payments over $1 million per month. Id.; See also Exhibit 34.
The Shareholder Has Subscribed to All of the Capital Stock of the Corporation or Otherwise Caused its Incorporation
Bonham caused the incorporation of World Plus and was its sole shareholder; she acquired all the stock of Atlantic Pacific. Exhibits 8 and 16.
The Corporation Has Grossly Inadequate Capital
Both corporations were grossly undercapitalized as is inherent in a Ponzi scheme. Neither corporation kept books in accordance with any legitimate accounting practice, so it cannot be said that either had any "capital" at all. No share certificates were issued to Bonham, so of course she made no actual investment in either of the companies for her share ownership. Not only did the companies lack any formal capital, they had inadequate revenues or retained earnings to service their debts as they matured. As is evident from the bank deposits of World Plus and Atlantic Pacific, they each brought in and paid out far more than any possible frequent flier sales could generate. Historically, World Plus had cash deposits of approximately $200,000 per month for the period January 1990 through October 1991, the period immediately prior to incorporation. See Exhibit 34. From October 1991 through March 1993, World Plus deposited approximately $325,000 per month. Id. After March 1993, Bonham opened the Atlantic Pacific account and began to deposit approximately $750,000 per month, while deposits to World Plus fell to approximately $100,000 per month. Id. On the other side of the coin, payments by World Plus, and later Atlantic Pacific, largely matched the deposits. Id.
Even looking at World Plus alone, the historical monthly sales of frequent flier tickets could not remotely account for the deposits. As the Court may recall, there was an extensive examination of Bonham regarding the inventory of frequent flier miles as part of the trustee's Motion to Convert. Ultimately, Bonham's most consistent testimony was that when someone wanted a ticket she would go through a frequent flier broker to obtain the ticket. The debtors' records show that World Plus did issue a number of checks to Westdale Holdings for the purchase of frequent flier tickets. See Exhibit 32. From December, 1993 through the petition date, World Plus wrote $420,938.35 in checks to Westdale Holdings. Id. As set forth in the trustee's Motion to Convert, for the period from January 1994 through January 1995, World Plus sold 784 tickets for $463,533. Compton Affidavit, ¶56, Exhibit 33. However, World Plus' records show that the cost of the tickets was $385,947, leaving World Plus with a gross profit of only $77,586. Id. The reality of the situation was that World Plus sold approximately 60 frequent flier tickets per month and averaged monthly sales of $35,656. To suggest that sales of frequent flier tickets could account for the monthly deposits into World Plus is beyond credibility. The difference must reflect the continuing flow of investment dollars, obtained from creditors lured by the offer of triple digit annual returns.
While World Plus at least had the facade of a business, Atlantic Pacific had no front at all. Atlantic Pacific's only activity was issuing investment contracts. Compton Affidavit, ¶¶ 55 and 60. It was never capitalized. Atlantic Pacific issued its first investment contract before Bonham ever acquired an interest in it. See Exhibit 36. Atlantic Pacific's bank account was opened with a $5,000 check from World Plus. Compton Affidavit, 31, Exhibit 12. However, because Atlantic Pacific had no capital or earnings from legitimate business, and never engaged in any venture other than the issuance of debt instruments, it was undercapitalized from its inception.
Moreover, at the time Bonham opened the FNBA account, Atlantic Pacific operated as the "dba" of Raejean Bonham, and was funded in large part by investments payable to World Plus. Exhibits 12, 38 and 70. The debtors' records show that World Plus transferred at least $3.8 million to Atlantic Pacific. Exhibit 37. These records also reflect over $700,000 in transfers from Atlantic Pacific to World Plus. Id. However, there are no records setting forth the relationship between the corporations. There are no records reflecting the transfer of funds between the corporations or which justify this wholesale transfer of funds. As in New Centers Hosp., there are no documents to evidence the transfers from World Plus to Atlantic Pacific. Compounding this problem is Bonham's practice of directly depositing World Plus investments into Atlantic Pacific's bank account. Exhibit 38. Sometimes Bonham would simply strike out "World Plus" as payee and write "Atlantic Pacific." See Exhibit 40. Whichever of her pockets needed money at the moment, Bonham would simply transfer money from another pocket to fill the need. The inter-corporate transfers further reflect the undercapitalization of each entity.
The Shareholder Uses the Property of the Corporation as Her Own
Bonham treated the property of each corporation as her own. Perhaps most significantly, Bonham herself has testified "I am World Plus." Compton Affidavit ¶ 21, The investment income was the principal revenue of World Plus, and the only revenue of Atlantic Pacific. However, Bonham transferred it between the corporations apparently at random, and converted World Plus investment deposits by placing them directly into Atlantic Pacific's FNBA account. Exhibit 37. Eventually, she converted assets into her personal account with Key Bank so she could use that account to pay investors. Compton Affidavit ¶ 75, Exhibit 46.
Bonham also used World Plus assets to pay personal bills. As set forth in detail in Compton v. Bonham et al, Case No. F95-00897-004 HAR, Bonham used World Plus to pay her mortgage, heating and heating oil. Compton Affidavit, ¶ 97, Exhibit 66. While the trustee is still investigating Bonham's personal use of the investors' money, it is also clear that she used World Plus to pay for life insurance on her and her husband. Id. at ¶ 96. She used World Plus to make automobile payments. Id. at ¶ 94. World Plus also transferred over 199,000 to her husband's business S & S Services. Id. at ¶ 93. Bonham also used over $90,000 of World Plus money to buy motorcycles, and construction equipment. Id. at ¶ 97. Finally, Bonham used World Plus funds to pay for personal charges on credit cards Id. at ¶ 100.
Whether the Directors or Executives of the Corporation Act Independently in the Interest of the Corporation or Simply Take Their Orders from the Shareholder in the Latter's Interest
The directors or executives of the corporation did not act independently in the interest of the corporation. Bonham was the sole officer of Atlantic Pacific, held three of the four offices in World Plus, and sole director of both corporations. As Bonham herself has admitted, she was World Plus, and World Plus was the same thing as Atlantic Pacific. Compton Affidavit ¶ 21, Exhibit 75. From at least 1988 through 1992 Bonham maintained her business checking account under both her name and World Plus, Inc. to make payments to her investors. Compton Affidavit, ¶¶ 67 and 68. Exhibit 82. In 1993 when she began to use Atlantic Pacific, Bonham opened up her banking account with FNBA as "Raejean Bonham dba Atlantic Pacific." Compton Affidavit, ¶ 31, Exhibit 12. Bonham proceeded to pay World Plus investors from the Atlantic Pacific account. Those investors that repeatedly invested in Bonham's scheme were rolled over from World Plus to Atlantic Pacific and back to World Plus. Exhibit 39. Payment on World Plus contracts would be made from Atlantic Pacific. Id. Throughout, no reasons were given for why an investor received one contract from one corporation, then the next from the other corporation, or why Atlantic Pacific was paying World Plus contracts.
Bonham has previously described Atlantic Pacific as World Plus' "dba." Thus, when she applied for an account with Merrill Lynch, she opened the account as "World Plus, Inc. dba Atlantic Pacific Funding Corp." Merrill Lynch rejected the application and required Bonham to choose one or the other. Raejean opened the account for World Plus. However, her checks on the account still read "World Plus, Inc. dba Atlantic Pacific Funding Corp." See Check No. 1001 dated November 20, 1995 to Dean and Heidi Haller, (Exhibit 45).
Whether the Formal Legal Requirements of the Corporation Are Observed
Beyond the bare filing of articles of incorporation, the formal legal requirements of neither World Plus nor Atlantic Pacific were ever observed. Neither corporation ever issued stock certificates. World Plus filed its Initial Biennial Report with the State of Alaska, but never filed any subsequent biennial report. Atlantic Pacific filed the equivalent report in Nevada, the List of Officers and Directors. However, the first List filed reflected that Charles Ferrara was the president, secretary and treasurer of the corporation and did not identify the directors of the corporation. It is only after the State of Idaho pointed out to Bonham, and her counsel, that Nevada's corporate records did not contain any evidence of her authorization to act on behalf of Atlantic Pacific, that Atlantic Pacific filed its List showing her as officer and director. No shares were ever issued, and no meetings were ever held after the initial meetings, except when the State of Idaho began to inquire into Atlantic Pacific's organization and found that Raejean was neither an officer or director of the corporation. Compton Affidavit, ¶ ¶ 35, 37, and 89-90. As recognized by the court in Eagle-Picher, the mere filing of corporate papers is not sufficient to prevent substantive consolidation. 192 B.R. at 907. There, the corporations had maintained the necessary corporate records, but consolidation was ordered. Here, only the minimum necessary corporate forms were created and marginally maintained if at all.
The trustee has not found any financial statements for either World Plus or Atlantic Pacific. Compton Affidavit ¶¶ 29 and 39. The only tax returns the trustee has discovered are those Bonham filed for the tax years 1989 and 1990. Compton Affidavit ¶ 19. Bonham never filed state or federal tax returns for either World Plus or Atlantic Pacific. Id. at ¶¶ 19 and 29. These facts indicate a total disregard of corporate formalities, thereby compelling a finding that the corporations were the alter egos of Bonham.
Bonham used World Plus and Atlantic Pacific to Defeat Public Convenience, Justify Wrong, Commit Fraud and Defend Crime.
This court should also disregard the corporate veil because Bonham used the corporate form to "to defeat public convenience, justify wrong, commit fraud, or defend crime." Jackson v. General Electric Co., 514 P.2d at 1172-73. Bonham used World Plus and Atlantic Pacific to operate a Ponzi scheme throughout the United States. Bonham's facade for her investments was the purported purchase of frequent flier miles in bulk from large corporations such as Sony, IBM, and Magnavox, at a discount, enabling World Plus to turn these miles into tickets and sell them to the public at huge profits. In truth, Bonham had no contracts with companies such as Sony, IBM, or Magnavox, to purchase their frequent flier miles. Her assertions that she did were fraudulent, intended to inspire confidence in her investors so that the Ponzi scheme could be perpetuated. When the Idaho Department of Finance conducted its investigation, it asked for proof of these purported contracts as a result of a taped conversation in which Bonham represented that she had been buying miles from IBM, Magnavox, Sony, and Apple. Compton Affidavit, ¶ 52, Exhibits 29. Bonham produced a "contract" with Patriot Management Corporation for the purchase of three million miles conveniently dated around the time of the investigation. Exhibit 26. In response to the demand, Bonham apparently produced another contract to purchase frequent flier miles with an "Apple Corporation" signed by Terry Franklin. Compton Affidavit, ¶ 52, Exhibit 28.
The trustee has never found any mileage purchase agreement other than the Patriot Management contract. Compton Affidavit, ¶¶ 51, 53, and 59. Patriot Management is an investor who has received approximately $1,170,000 from World Plus and Atlantic Pacific from 1993 through the middle of 1995. See Complaint, Compton v. Patriot Management Corp., et al. Adv. Case No. F95-00897-436, a copy of which is attached as Exhibit 27. The trustee has been unable to locate the purported contract with "Apple Company", but apparently it was signed by Terry Franklin, Raejean's brother and another investor who received over $199,000 in payments from World Plus and Atlantic Pacific in 1994 and 1995 alone. Compton Affidavit, ¶ 53, and Exhibit 30.
While World Pacific at least had the facade of using the investments to support its frequent flier ticket business, Atlantic Pacific engaged in no bona fide business activity whatever. Rather, its sole business was the investment contracts. Though Bonham has previously made representations that Atlantic Pacific was engaged in the purchase and resale of large blocks of frequent flier mileage, there is nothing in the debtor's records to indicate that Atlantic Pacific ever received any funds other than investment monies. The overwhelming number of deposits and payments involving Atlantic Pacific were even numbers such as $2,500, $5,000, and $10,000. The only regular payments that Atlantic Pacific made to a non-investor were utility payments to Fairbanks "MUS" and Nevada Bell. Compton Affidavit, ¶ 43. The only logical inference for Bonham's use of Atlantic Pacific is that after the Alaska investigation, Bonham consciously sought to use Atlantic Pacific to avoid securities registration and defraud her creditors by perpetuating the Ponzi scheme.
In this instance, there is no question that Bonham dominated and controlled World Plus and Atlantic Pacific, using the corporations to further her Ponzi scheme. There was no separation between herself, World Plus and Atlantic Pacific. This is often reflected in her use of the "d/b/a" designation on the various financial accounts, and ultimately in her Voluntary Petition. While the corporations are Bonham's mere instrumentalities, they were also used to perpetuate fraud. Issuing investment contracts which cannot be fulfilled without further borrowing from another similarly hoodwinked investor is classic fraud.
This case falls squarely in the class of cases including Cooper, Eagle-Picher, and New Center Hosp., where substantive consolidation was ordered based upon the substantial identity of the parties. As noted by the court in New Centers Hosp., by establishing that the bankrupt and its subsidiaries were alter egos, the movant had satisfied both the substantial identity component required under Eastgroup and Auto-Train, as well as the excessive entanglement component of Augie/Restivo. 187 B.R. at 569. Because World Plus and Atlantic Pacific are the mere instrumentalities of Raejean Bonham which were used to perpetuate her fraud, there is a substantial identity to support substantive consolidation.
Consolidation Is Necessary
to Avoid Some Harm or to Realize Some Benefit or to deal with
Excessive Entangling.
The second requirement of substantive consolidation under the Eastgroup analysis requires that consolidation be necessary "to avoid some harm or realize some benefit." Eastgroup, 935 F.2d at 249. The avoidance of harm/realization of benefit prong of the Eastgroup test substantially overlaps the excessive entanglement component in the Second Circuit's test. In Augie/Restivo, the Second Circuit noted that substantive consolidation was appropriate where "all creditors will benefit because untangling is either impossible or so costly as to consume the assets." 860 F.2d at 59.
This element is met where the affairs of the parties to be consolidated are so intertwined that the there would be significant costs to untangle those affairs. Eastgroup, 935 F.2d 251 (benefits of consolidation included ensuring that creditors of bankrupt would not be harmed by transfers to other corporation for which there was no compensation). It is not necessary that the affairs of the parties be incapable of untangling. As recognized by the court in New Centers Hosp.:
[E]ven when the financial relationships among the parties to be consolidated are capable of being untangled, the affairs of the parties may nonetheless be 'inextricably intertwined.' If intercompany debts and transfers are numerous and the operation are interdependent, the parties are 'entangled' even if a detailed analysis of the records could ultimately identify the true assets and liabilities of the separate entities.
187 B.R. at 569 (citing In re Standard Brands Paint Co., 154 B.R. 563, 572 (Bankr. C.D. Cal. 1993); see also Augie Restivo, 860 F.2d at 59.
In this case, Bonham mixed the investment income from World Plus into Atlantic Pacific in a number of ways. The most direct evidence is the transfer of funds from World Plus to Atlantic Pacific without consideration or bookeeping of event he most rudimentary nature. For the approximately three years that Atlantic Pacific maintained a bank account, World Plus transferred over $3.8 million to Atlantic Pacific without any evidence of promissory notes or other records of transfer. Compton Affidavit, ¶ 70. Bonham also directly deposited into Atlantic Pacific accounts checks made payable to World Plus. Id. at 71. On the other hand there were also $600,000 in transfers from Atlantic Pacific to World Plus. Id. The trustee has identified a number of payments from Atlantic Pacific to investors holding World Plus contracts. To ascertain the precise amount of transfers from World Plus to Atlantic Pacific and vice versa, the trustee would be required to first obtain copies of each and every investor check, then review each and every deposit made, and not only the payee, but also the endorsements of each check, and then the trustee would have to try to ascertain the purpose of each transfer, a virtual impossibility without contemporaneous bookkeeping entries from which to work. A complete accounting is impossible even then because Bonham engaged in "lateral transfers," that is, taking an investment check from one person and making it payable directly to a prior investor to whom either World Plus or Atlantic Pacific owed money and without first passing the money through any account, whether in the name of Bonham herself or any of her entities. Id. at ¶ 76. Because such payments never entered any account controlled by Bonham, there is no record of payment.
To complicate matters even further, Bonham directly deposited over $500,000 of investor income into her personal account within 90 days from the petition date. Bonham used the money to pay investment contracts, whether the contracts were nominally under Atlantic Pacific or World Plus has yet to be determined.
If the estates are not consolidated, the trustee would be required to examine each and every payment made to the investors and match the payments with each and every contract issued. All of the above would result in a circuitous use of the estate's scarce resources. If not consolidated, the estates of Bonham, World Plus, and Atlantic Pacific would be required to investigate the individual transactions, and initiate adversary actions against each other to recover the fraudulent transfers. As the only assets of the estates are the preference and fraudulent conveyance claims against the investors of World Plus and Atlantic Pacific, all that would be accomplished would be to increase administrative expenses. As recognized by the courts in New Centers Hosp. and Augie/Restivo, the entanglement amongst the parties, and the cost to unravel it, is a sufficient reason to support substantive consolidation under either test. Substantive consolidation will benefit the creditors by avoiding the almost impossible, and certainly very expensive, effort required to segregate the corporations and determine their separate assets and liabilities.
The Creditors Dealt with Bonham, World Plus and Atlantic Pacific as a Single Economic Unit
Under the Augie/Restivo test, the movant seeking substantive consolidation satisfies his burden by demonstrating that either the affairs of the parties are so entangled that consolidation will benefit all creditors, or the creditors have dealt with the parties as a single economic unit. Augie/Restivo, 860 F.2d at 518. The Eastgroup analysis incorporates the same analysis, but places the burden of proof on any objecting creditor, and only after the movant has made a prima facie showing of a right to substantive consolidation. Eastgroup, 935 F.2d at 249.
Because excessive entanglement exists, the trustee need not address the economic unit component of the Augie/Restivo test. However, this separate test is satisfied as well. The bankruptcy court in Eagle Picher consolidated the corporate debtor with one of its incorporated divisions. In ordering consolidation, the court noted, the "substantial identity between [the subsidiary and parent] persuades us as well that no reasonable creditor of [the subsidiary] could believe that it was not dealing with [the parent]. This conclusion alone is sufficient to warrant a holding that substantive consolidation is justified according to the Second Circuit test as analyzed by the Reider court." In re Eagle-Picher Industries, Inc., 192 B.R. 903, 907 (Bankr. S.D. Ohio 1996). The court further rejected the plaintiffs' arguments that they relied on the separate credit of the subsidiary or that they would be prejudiced by substantive consolidation.
The Second Circuit in Augie/Restivo denied substantive consolidation of two corporations that had combined in a stock sale where each of the corporations had separate lenders prior to their exchange of stock. Afterwards one of the lenders continued to do business with the combined entity but still required a separate guaranty from the other corporation. Thus, where the lenders did not have knowledge that the two corporations were a single economic entity, nor did they treat them as such, consolidation was inappropriate. Id. at 518-19.
In In re Drexel Burnham Lambert Group, Inc., 138 B.R. 723 (Bankr. S.D.N.Y. 1992) the court discussed the criteria for substantive consolidation of numerous subsidiaries of a diversified financial services enterprise. Even though the record-keeping was far better than here, and the corporate formalities were generally observed, the court had no trouble ordering substantive consolidation where the collective debtors generally were involved in the same overall business as a single business enterprise. The court stated:
With only few and identifiable exceptions, the Drexel Operating Companies, the Drexel Investment Companies, and DBL Capital shared overhead, management, accounting, and related expenses with DBL Group or its wholly owned broker- dealer subsidiary DBL Inc. There were numerous and well known intercompany guarantees running from DBL Group to the Subsidiaries. DBL Inc., through DBL Group, employed and paid virtually all employees who performed services for the Debtors. Many of the Debtors did not publish unconsolidated financial statements. DBL Group owned all of the capital stock of all of the other Debtors. Many of the Drexel Operating Companies and the Drexel Investment Companies had officers and/or directors in common. DBL Group or DBL Inc. financed the activities of virtually all of the Debtors on an intercompany basis. DBL Group determined the persons who served as directors of virtually all of the Drexel Operating Companies, the Drexel Investment Companies, and DBL Capital. The Drexel Investment Companies had substantially no business other than business with or related to DBL Group and its Affiliates and no assets except those conveyed to it by DBL Group or DBL Group's Affiliates. The Drexel Operating Companies, the Drexel Investment Companies and DBL Capital represented, among other things, various lines of business for "Drexel Burnham Lambert" and were held out to the public as such. The directors of those companies took direction from and acted in the interests of the "Drexel Burnham Lambert" enterprise and all of the companies conducted their affairs from the same business locations.
138 B.R. 723, 766; see also Standard Brands Paint, 154 B.R. at 572 (ordering consolidation of debtor parent with subsidiaries where they held themselves out as consolidated unit.)
As in Eagle-Picher, the facts supporting substantial identity/excessive entanglement here require a finding that creditors of World Plus and Atlantic Pacific did not treat them as separate corporations but considered them a single economic entity. Bonham herself refers to them indiscriminately. Bonham has admitted that she considers herself to be World Plus, and that she considers Atlantic Pacific and World Plus to be one entity. Compton Affidavit, ¶ 21, Exhibit 75, p. 43. While her stories may change, she informed people that one company purchased the tickets and one company held the investments. Indeed, at the inception of the scheme Bonham was personally associated with World Plus as evidenced by her checking accounts. Compton Affidavit, ¶¶ 67-68. The same occurred when Bonham began to use Atlantic Pacific, as reflected in her checks and bank account which stated that it was "Raejean Bonham dba Atlantic Pacific." Compton Affidavit, ¶ 69, Exhibit 12. Upon creation of Atlantic Pacific, her correspondence contained both corporations on its letterhead, and she began to mix the investments from World Plus to Atlantic Pacific, including rollovers. Exhibits 24 and 39. She also began to use Atlantic Pacific's bank account to pay investments from World Plus as well going so far as to have an endorsement stamp created reflecting that Atlantic Pacific Funding Corporation did business as Atlantic Pacific and World Plus. Exhibits 38, and 40-41. Eventually, Bonham tried to open her account with Merrill as "World Plus, Inc. dba Atlantic Pacific Funding Corp." Exhibit 44. Though Merrill Lynch did not allow this, Bonham proceeded to use checks containing that exact language. Exhibit 45. She also opened the Denali State Bank account in the name of "World Plus, Inc. dba Atlantic Pacific Funding" and endorsed investment income in a similar manner. Compton Affidavit, ¶ 73, Exhibits 42-43. Finally, near the end Bonham began depositing investment income into her personal account with Key Bank, and paid investment contracts out of the same personal account. Compton Affidavit, ¶ 75.
The vast majority of the creditors of World Plus and Atlantic Pacific are the investors in the Ponzi scheme. Based on the above facts, and the absence of financial statements or tax returns, there can be no serious contention that any creditor relied on the separate corporate identities when making their investments. Rather, they dealt with Raejean Bonham, and did what she told them. So long as someone was paying the investors their 20-50% interest, none complained.
Evidence of reliance on separate corporate identities would include, at a minimum, the distribution of, and reliance on, financial statements for each corporation. There is no evidence that any investor ever requested or received a balance sheet or income statement for World Plus or Atlantic Pacific, and it appears that such documents never existed. Investors were attracted by word of mouth to the promise of huge short-term gains, not by the stability of a proven enterprise with an audited track record. No investor who speculates for a triple digit annual return has any right to complain that he was relying on the financial state of an enterprise whose financial statement he never viewed. There is no evidence that any of these documents were ever even prepared, let alone distributed to investors or potential investors.
The investors invested in a unitary and secret scheme which Bonham told them involved the purchase of frequent flier miles that used one corporation to gather the investments to fund the purchase of the tickets, and the other to buy and sell the tickets. To the extent that creditors were told anything, they were told that a single business was being conducted. While they may have been told the business was the purchase and sale of frequent flyer miles, whereas in fact the mileage transaction were simply a front for massive investment fraud, there was a single business in which Bonham involved both corporations to an equal degree. Indeed, what the investors saw was a single office, with the same phone numbers, the same address, the same employees, all controlled by Raejean Bonham. As in Eagle-Picher, New Center Hosp., and Standard Brands Paint, there was a single economic entity, and substantive consolidation is appropriate. See In re Kroh Bros. Development Co., 117 B.R. 499, 502 (W.D. Mo. 1989) (no reliance on separate credit where corporation had no separate employees, offices, or bank accounts, and derived its income from the debtor.)
The last component of the Eastgroup analysis is the potential harm to the creditors that substantial consolidation might create. Eastgroup, 935 F.2d at 249. Though there is not a similar requirement expressly stated in the Augie/Restivo test, courts incorporate the separate credit component and assume that prejudice exists if one relied on the separate credit of the parties to be consolidated. Such was the case in Augie/Restivo, where a lender had relied on the assets of one corporation before it had exchanged its stock with the other corporation. There, substantive consolidation would have subordinated the lender's unsecured portion of debt to the payment of administrative expenses incurred by the other corporation as a result of the operation of the bankruptcy estate. See also Flora Mir Candy Corp. v. R.S. Dickson & Co., 432 F.2d 1060 (2nd Cir. 1970).
In the instant case, there is no potential harm arising from substantive consolidation. While the investor avoidance defendants might be discomfited by the removal of one of the theoretical defenses available to them, the loss of the defendants' procedural defense is not the kind or quality of prejudice that would preclude consolidation. Indeed the removal of these defenses is a benefit to the estate and the creditors. Rather, the Court should analyze whether substantive consolidation would destroy or impair a creditor's claim. Augie/Restivo, 860 F.2d at 520 (consolidation would result in subordination of secured lender's unsecured claim); Flora Mir Candy Corp. v. R.S. Dickson & Co., 432 F.2d 1060 (2nd Cir. 1970) (consolidation would have eliminated inter- company claim that belonged to one of 13 companies). Consolidation does not affect any of the claims held by creditors. Rather, it equitably pools the total assets, the avoidance claims, to be distributed to the all creditors with allowed claims that invested in the scheme, and thus enhances the estate to the benefit of the bona fide creditors.
The Delta Airlines claim is a separate issue which should be carved out of this Court's order of substantive consolidation
Delta Airlines has filed Proof of Claim No. 1002 for an amount in excess of $10,000,000. A copy of that claim is Exhibit 72. This claim is substantial enough in size, and different enough in nature, that it should be carved out of this Court's order of substantive consolidation.
Delta Airlines filed Delta Airlines, Inc. v. Seward et al., Case No. 1:93-CV-1036- HTW, in federal district court in Georgia against Raejean Bonham, Steve Bonham, World Plus Inc., and many other frequent flyer brokers throughout the country seeking injunctive relief and damages. Atlantic Pacific Funding Corporation is not a named defendant. On May 21, 1993, Delta obtained an injunction that the defendants in the Georgia action, including the Bonhams and World Plus, stop trafficking in frequent flyer miles. Delta claims that the debtors violated that injunction. Delta seeks both pre- and post-injunction damages. On June 19, 1996, Delta obtained relief from the automatic stay to liquidate its claim.
The trustee has been in contact with Delta's Georgia attorneys but has not retained Georgia counsel to represent the estate. Delta's theory of damages appears to be calculated based upon the "walk-up" fare for each and every ticket that debtor sold. Further, Delta believes that the measure of damages against the estate should not take into consideration the fact that utilization of the frequent flyer miles represents satisfaction of a liability of the airline. Delta has obtained judgments against other ticket brokers in other cases where a Georgia judge, applying Georgia law, upheld Delta on these points. The facts of those case may or may not be on all fours with the facts of Raejean's ticket operation: the trustee has by no means conducted a comprehensive review of those cases, but it appears to the trustee that at least some of those cases involve the court punishing a defendant for violating an express court order; none of those cases involve a ticket broker in bankruptcy where a large award ends up punishing only the other creditors.
In the trustee's view, Delta airlines has suffered some loss as a result of debtor's activities which very likely entitles Delta to an allowed claim against the estate. The trouble is that Delta's method of calculation of its loss wildly inflates its claim. It is unrealistic to believe that each illegitimate frequent flyer customer of World Plus would have bought a "walk up" full fair ticket if the questionable frequent flyer ticket had not been available. The customer might have travelled on another carrier, or purchased an advance Delta ticket at lower cost, or simply stayed home. It is unfair that the investors' claims should be carefully limited to a hard dollar loss, whereas Delta's claim is a large multiple of any conceivable hard dollar loss it could have suffered - particularly since the only assets in this case derive not from profits from ticket sales, but from recoveries in the Bonham Recovery Actions. This unfairness may call for a reimposition of the automatic stay, and it may call for an equitable subordination of some or all of Delta's claim. Perhaps it is relevant that Atlantic Pacific Funding Corporation - which is not involved in ticket sales at all, and which existed solely to perpetuate the Ponzi scheme fraud on the investors - was not a defendant to the Georgia litigation.
It is too early in the case to attempt to resolve these issues. Rather, Delta's participation as an unsecured creditor in these consolidated cases should be carved out of any consolidation order. At such time as there are assets to distribute, and after further facts have been brought to light, including the amount, timing and nature of Delta's claim, this Court can rule on whether or how Delta should participate.
Substantive Consolidation should be Ordered Nunc Pro Tunc to the Petition Date
Should the Court find that: (1) either World Plus or Atlantic Pacific are not presently debtors within this bankruptcy; and (2) order substantive consolidation of the estates, then it must also decide what date controls the trustee's avoidance actions under 11 U.S.C. §§ 547 and 548. The trustee submits that the date should be December 19, 1995, the date of the Involuntary Petition. The leading case on nunc pro tunc treatment of substantive consolidation is the District of Columbia Circuit's decision in In re Auto-Train Corp., Inc., 810 F.2d 270 (D.C. Cir. 1987). While recognizing that the test for consolidation adequately analyzed the issues, the court proposed a balancing test between the potential harms and benefits. Id. at 276. The court explained:
a court should enter a consolidation order nunc pro tunc only when it is satisfied that the use of nunc pro tunc yields benefits greater than the harm it inflicts. This inquiry will closely parallel that conducted with respect to consolidation. Because the court will already have established a substantial identity between the entities to be consolidated, this inquiry begins with the proponent of nunc pro tunc making a showing that nunc pro tunc is necessary to achieve some benefit or avoid some harm. Following this showing, a potential preference holder may challenge the nunc pro tunc entry of the consolidation order by establishing that it relied on the separate credit of one of the entities to be consolidated and that it will be harmed by the shift in filing dates. If a potential preference holder meets this burden, the court must then determine whether the benefits of nunc pro tunc outweigh its detriments.
Id. at 277.
As in In re Kroh Bros. Development Co., 117 B.R. 499, 502 (W.D. Mo. 1989), application of consolidation nunc pro tunc to December 19, 1995, benefits the estate by allowing it to pursue preference and fraudulent conveyance claims that it may not otherwise be able to pursue if the date of this Motion is used as the controlling date. The trustee has in this motion explained in great detail how no party could have relied on the separate credit of any of the parties to be consolidated, if for the simple fact that there is no record that anyone inquired as to credit of any of them.
While courts generally cite Auto-Train in support of nunc pro tunc application of substantive consolidation, the standards set forth are not always applied. As noted by the Sixth Circuit in In re Baker & Getty Financial Services, Inc., 974 F.2d 712 (6th Cir. 1992), the Auto- Train test is redundant and subsumed by the underlying test for substantive consolidation. Id. at 721 ("It would add needless confusion to allow relitigation of this question in the guise of litigation over the filing date, particularly when the outcomes will almost always be the same.")
Baker & Getty is instructive give the similarity of facts and issues. There, the debtors were corporations engaged in a Ponzi scheme to sell blocks of stock at steep discounts purportedly allowing the debtors to provide large returns to its investors. An individual investor had taken a million dollar loan from a local bank, but required the debtor corporations' principal to sign the loan as well. When the investor failed to make payments, the bank was able to convince the principal to make three payments. After the corporations were involuntarily placed into bankruptcy, the creditors sought to consolidate the bankruptcy with the principal. The transfers had occurred within 90 days of the involuntary petition, but more than 90 days before the motion for substantive consolidation was filed. The bankruptcy court ordered substantive consolidation. Matter of Baker & Getty Financial Serv., Inc., 78 B.R. 139, 142 (Bankr. N.D. Ohio 1987) ("It is abundantly clear from the totality of facts in this proceeding that the Debtor Corporations are the alter ego of [the principal]. Accordingly, it is clear that substantive consolidation would be desirable in this case.") The bank challenged nunc pro tunc application of consolidation. The basis of the bank's argued it was severely prejudiced because nunc pro tunc consolidation of estates would expose it to a preference cause of action. The bankruptcy court rejected the objection as a reason for denial of nunc pro tunc application of substantive consolidation. The Sixth Circuit affirmed the nunc pro tunc order for substantive consolidation:
The order of consolidation rests on the foundation that the assets of all of the consolidated parties are substantially the same. Therefore, the earliest filing date is the controlling date, and all transfers are to be analyzed as of that date.
Id. at 721.
As in Baker & Getty, and Kroh, the facts supporting substantive consolidation support nunc pro tunc application of the order granting substantive consolidation. Absent retroactive application, the trustee will lose the ability to pursue preference and fraudulent conveyance claims under the Bankruptcy Code. For the reasons stated above there are no creditors who relied on the separate credit of the parties. Moreover, as the Sixth Circuit observed in Baker & Getty, given that the parties to be consolidated are essentially the same (the trustee believes they are the same), it is appropriate to use the earliest date for the trustee's avoidance actions.
For the reasons stated above, this bankruptcy estate now includes and has always included World Plus, Inc. and Atlantic Pacific Funding Corporation, Raejean Bonham's wholly owned corporations which she used to run her Ponzi scheme. Based upon the Court's previous rulings and the alter ego of the parties the Court should declare the estates of Bonham and her entities jointly administered and substantively consolidated, and the Court should order the caption of this case amended to so reflect.
Dated this 22nd day of January 1, 1997.
BUNDY & CHRISTIANSON
Attorneys for Trustee
/s/Cabot Christianson
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